Teleflex: Hospital Supply's Best Kept Secret

The name Teleflex barely registers among most device executives and hospital customers, but the company's individual brands, Weck, Pilling, and Rusch, are well-known. Teleflex's greatest challenge lies in finding a middle ground between its niche approach, built on the strong brands of its individual businesses, and the resources available from a larger, coordinated corporate effort. It's an issue of identity: can Teleflex ever be anything other than a collection of strong brands?

Little-known Teleflex may be the device industry's best-kept secret, combining strong brands and an identity problem with the normal problems facing mid-sized device companies.

by David Cassak

• The name Teleflex barely registers among most device executives and hospital customers, but the company's individual brands, Weck, Pilling, and Rüsch, are well-known.

• That's been fine until now for Teleflex, whose broader strategy rests on finding strong market niches. But company officials would like to be bigger and better known.

• Teleflex's greatest challenge: finding a middle ground between its niche approach, built on the strong brands of its individual businesses, and the resources available from a larger, coordinated corporate effort. It's an issue of identity: can Teleflex ever be anything other than a collection of strong brands?

• But Teleflex also faces the challenge of any mid-sized device company: how to survive in a marketplace in which both customers and competitors are getting larger and gravitating toward each other. Teleflex's response: exploit its strong brands and back them with innovative, physician-preferred products that create defensible niches too small for competitors to worry about and too important for customers to ignore.

Imagine a $2 billion company that has for the last several years consistently returned mid- to upper-teens in earnings, revenue growth and share performance, and maintains a sizeable holding in medical devices and hospital supply—and yet there's a very real chance that, particularly if you're in medical devices, you've never heard of the company. That's the plight of Teleflex Inc. , a Pennsylvania-based aerospace and automotive company that has, over the past decade, quietly been building a presence in hospital supply.

Much better known are Teleflex's three leading brands, Weck closure devices, Pilling surgical instruments, and Rüsch urology and anesthesiology catheters, each of which have been fixtures on the hospital market for more than 100 years. Teleflex officials acknowledge they have something of an identity problem. And raising their profile in the medical device industry is one of the company's most pressing goals over the next several years.

Even more pressing may be that, as an aggregation of individual brands, Teleflex faces another sort of problem: that of the mid-sized device company. As customers have consolidated on one side and competitors on the other, mid-sized companies have increasingly found themselves caught in the middle—a no-man's land of less-than-adequate resources chasing ever more elusive customers. That's why, more than any other segment of the device industry, mid-sized suppliers have seen the greatest attrition over the past several years.

Today, the mid-sized company seems like a dying breed. Yet those that survive have, against all odds and expectations, a surprising resiliency. As big competitors deal with growth challenges of their own, mid-sized companies often can succeed by finding the right kind of niche and focusing on physician-preferred products—a strategy central to Teleflex's long-term plan, which is to exploit its strong brands and back them with innovative, physician-preferred products that create defensible niches too small for competitors to worry about and too important for customers to ignore. Indeed, Teleflex's greatest challenge is no longer survival, but reaching its next goal: annual sales of $1 billion and the broader recognition, for both its individual brands and a broader corporate identity, would come with that.

Are We Sure We Want To Do This?

Teleflex started in Canada during the Second World War as a manufacturer of aviation cable controls for Spitfire airplanes based on technology licensed from a UK company also known as Teleflex. Soon after the war, the company moved to Pennsylvania and by the late 1950s had begun to apply its cable controls technology to other industries, most notably automotive and marine.

Teleflex's success in cable controls led it into allied technology areas—for example, it developed a proprietary coating, highly temperature and corrosion resistant, for its jet engine cables—which enabled it to expand its businesses. One such technology play led the company to develop a unique polymer extruding capability to create a more flexible liner for its cable controls. Looking to extend the reach of that business, in the early 1980s, Teleflex began component manufacturing for medical device companies such as Becton Dickinson & Co. and Sherwood Medical, now part of Tyco International Ltd. , for use in their catheter lines.

Through the mid-1980s, the medical OEM business was a tiny part of Teleflex's overall business, which was nearing $500 million at the time. But company officials became increasingly attracted to medical devices as a more steady side business to their core automotive and aerospace lines, which are prone to be cyclical. "We felt it was time, strategically, to look for a new business, a third leg so to speak, and thought the medical business would be a nice balance for us," notes John Sickler, who at the time was head of Teleflex's aerospace business and today is chairman of its medical business.

The launch of the OEM business lay behind Teleflex's new strategic turn, though at less than $5 million, it was hardly big enough to fulfill the company's ambitions to establish a significant medical business—company officials knew they would have to buy their way in. In fact, the OEM business wasn't Teleflex's only experience with devices; in the early 1980s, the company made a nonstrategic investment in a small oxygen-based medical supplier, Narco Scientific, located near its headquarters just north of Philadelphia. "At the time, we were starting to get interested in the medical industry and thought that this was a way to get in, study it, and make sure this is what we want to do," says Sickler. At the time, Teleflex owned just under 10% of Narco.

The stake in Narco Scientific and the growth of its OEM business offered Teleflex enough of a perspective on devices to convince company officials of its appeal as an expansion opportunity. But building a business of any size would, company officials realized early, come at a price. "This was the mid-1980s, at the height of the leveraged buyout fever," Sickler recalls. "As an industrial company, we took one look at the prices, especially for medical companies, and asked ourselves, ‘Are we sure we want to do this?' So we headed off for Europe."

Teleflex's first acquisitions were relatively small—a couple of UK-based manufacturers of anesthesia-based products. But it's next purchase provided the base on which to build a medical business: German urology and anesthesiology supplier Willy Rüsch AG, which had been run by the same family for more than a century. "We were a US company competing against much bigger companies [to do the deal]," says Sickler. "But the fact that we were willing to maintain the family name and promote the brand" went a long way to convince Rüsch to sell to this relative unknown.

A Bottom-Line Impact

Having made its first major acquisition, Teleflex presented a somewhat unusual profile: a US-based device company doing 80% of its business in Europe. With its next two acquisitions—surgical instrument manufacturer Pilling Surgicalin 1991 and closure device specialist Edward Weck Inc. [See Deal] in 1993—Teleflex began to redress the imbalance. In 2000, Teleflex's medical business accounted for just under 25% of its total $1.7 billion in revenues, or around $411 million, with about half of its sales in the US and half in Europe. (A very small revenue stream comes from the Asia/Pacific region.)

Teleflex's medical business is split into three business units: a surgical device business made up of Pilling, Weck, and an instrument sterilization business called Surgical Services Inc.; a hospital supply business, which includes a growing non-hospital, home health segment, made up exclusively of Rüsch; and its original OEM business, known as Tfx Medical, which accounts for just under 10% of its total medical business.

In many respects, Rüsch was a natural first step for Teleflex: the polymer-based OEM business fit well with Rüsch's line of urological and anesthesia catheters. Pilling and Weck both built on and departed from Rüsch's core lines. A former division of Narco Scientific, Pilling, which makes instruments used in general as well as cardiovascular and ENT surgery, was spun off to a private equity firm soon after Narco was sold to Healthdyne Inc., an early manufacturer of sleep apnea monitors and oxygen concentrators, in 1983. Eight years later, Teleflex purchased Pilling, which it knew from its original Narco investment, from its financial owner. "Even though it moved us away from polymer products and represented our first foray into metal-based technology, we thought it made sense because it had a national sales force of 50-some reps and we felt that was a way to launch our Rüsch products in the US," says Sickler. (Weck, another surgical specialty company, was purchased two years later from Bristol-Myers Squibb Co. )

Given the size of its OEM operation, building its medical business through acquisition was a natural strategy for Teleflex. Even after acquiring Rüsch, company officials knew they'd have to continue to do deals. Pilling was attractive, Sickler recalls, "because at the time we were almost exclusively in Europe and were looking for ways to bring product into and penetrate the US."

But growth through acquisition would prove challenging for Teleflex beyond the high prices medical companies were commanding because actually coordinating efforts between companies like Rüsch and Pilling was easier said than done. Teleflex's broader corporate philosophy by its own admission works against close integration of acquired companies. "From an operational standpoint, we've been believers in decentralization and what we call small attack units," notes Sickler. "We're keenly focused on trying to establish leadership positions in small niches in our segments." Thus, Teleflex's medical business has 40 different locations, half in manufacturing, half in sales and distribution.

Acquisitions can be costly—not just in the amount of money Teleflex would have to spend, but in their impact on the company's bottom line. Like many firms, Teleflex sets corporate goals each year of 15% growth, top and bottom line. To achieve that, it assumes that half of its growth will come through acquisition, half through internal development. But during the early 1990s, 80% of the growth of the medical business was coming through acquisition, adding what Sickler calls "current value assets, because they were coming in fresh, compared to the 5-, 10-, or 15-year old assets in our other businesses," he says. "And our investors began to ask whether we were really getting the kinds of returns on [the medical business] that we were in our other businesses."

As a result, in the late 1990s, Teleflex consciously slowed the top-line growth of its medical business in order to bring its bottom-line performance in line with broader corporate goals for return on sales and investment. Since 1997, sales of Teleflex's medical business have only grown 8% annually, but its profits have increased 15% and operating margins have gone from 12.5% to 14.5%. But in the process, Teleflex stopped doing significant deals. After Weck in 1993, it made several small acquisitions, but nothing significant until last year, when it acquired Medical Marketing Group (MMG), a Georgia-based manufacturer of intermittent catheters used in home health care.

Sickler calls MMG "a significant investment for us," because it brings a product that can be integrated with Rüsch's existing line of intermittent catheters, presenting a global line that Teleflex hopes to grow 20% annually. Overall, Teleflex would like to double the annual growth rate of its medical business, to around 15% per year, "getting the top line goals back in synch with the rest of the corporation," he says.

Still, even MMG was doing less than $30 million at the time of its acquisition. And having spent the last several years building back the medical business' profitability, Teleflex is reluctant to fall behind again. Thus, Sickler hedges his bets when talking about acquisition strategies going forward. "I think we'll be less dependent on acquisitions, but they're going to be key to our growth," he says. Rüsch, alone, should see more than 10% growth just from internally developed new products, he says, and the company is making larger investments in R&D in order to "bear fruit from some of the things we did four or five years ago." More, he goes on, "If we can supplement that with some acquisitions, we're confident we'll be in the mid-teen level for top-line growth."

Going Direct

Founded in 1885, Rüsch grew modestly over the course of the next century, much like many family-owned German medical supply companies, notes Frank Sodha, a former consultant for PriceWaterhouseCoopers (PWC) who joined Rüsch in 1993 and now runs the worldwide Rüsch business. "But beginning in the early 1990s, Teleflex began to make a number of acquisitions and in the process turned Rüsch into a much more dynamic company," he says. (At $210 million in annual sales, Rüsch represents approximately 50% of Teleflex's overall medical business.)

About half of Rüsch's business, historically, was in urology and half in anesthesia supplies, competing largely against giants such as B. Braun Medical Inc. (a division of B. Braun Melsungen AG ), C.R. Bard Inc., and Mallinckrodt Inc. , both divisions of Tyco, as well as a host of small, local companies in each European country, with little change in the product line or the company strategy over the years. "Until 1993, the company was pretty stagnant," notes Sodha, led by managers who rarely deviated from approaches the company had used for decades.

Then in 1993, Teleflex hired PWC to do a consulting study to assess where the company should be going. As a result, a new management team was put in place and Rüsch embarked on a series of small acquisitions, beginning in 1995, including a French company, Euro Medical, a manufacturer of respiratory and anesthesia supplies and a small UK respiratory care supplier, UniMed Ltd. "The strategy was to go beyond just anesthesia and to offer a complete range of products in airway management," says Sodha, including a number of home care products such as oxygen concentrators, masks, tubes, and ventilators.

Rüsch's next major acquisition was, as noted, of US-based MMG. Adding MMG enabled Rüsch "to build a global position in that market," notes Sodha, making Rüsch the number-one intermittent catheter company in the US and number-two in Germany. And it followed with a number of small acquisitions in the late 1990s.

In part, Rüsch's acquisition path reflected a more fundamental decision, taken in 1995, to sell direct, beginning in Germany. "It was very difficult because we had had, for ages, family-owned companies as distributors and suddenly we had to tell them we were going direct," he explains. In some cases, Rüsch started its own distribution network; in others, it bought out its local distributor, moving from Germany through the rest of Europe establishing direct selling opportunities.

"The problem with distributors was that we weren't getting any direct feedback from our customers," Sodha explains. "A dealer would tell us what was good for the dealer, but not for Rüsch. As a result, we never knew whether customers were happy with the quality of the product, with its features, whether they wanted something else or some custom design. Now we know all that. "

Getting customer feedback is important for a company competing in what are essentially commodity product lines. Rüsch learned first hand customer assessments of its products relative to those of its competitors. "We began to hear people say, ‘Your products are good, but there's a competitor of yours that has a product that's not spectacular, but it's better than yours,'" says Sodha. "That kind of feedback was the biggest benefit we got from going direct."

As a result, Sodha insists, Rüsch's organic growth, around 9%, from both new and existing product lines, has been outpacing that of the anesthesia and urology markets that are growing 3-5% this year, and expects to maintain that momentum in the near future. Indeed, having secured its business in Europe and even in the Asia/Pacific region, Rüsch is now turning its attention to the US. "We're now concentrating on America, where we're very much underrepresented," notes Sodha. Rüsch's goal: to bring US sales, now around 30% of the company's total, to the level of European sales and achieve a 50/50 split between the two markets.

On an Acquisition Spree

Critical to Rüsch's future success will be several new product lines in temperature management, pain management, percutaneous tracheostomy, and non-vascular stents, the last featuring its Polyflexstent, used in a variety of applications including urology, pediatrics, trachea, and GI/colon cases. All are illustrative of Teleflex's niche-oriented strategy. Thus, for example, the tracheostomy product, called the PercuTwist, represents the kind of small, narrow niche that a company like Rüsch can dominate. (A case in point: in the US, Rüsch dominates the disposable laryngoscope blade market, though it doesn't make laryngoscopes per se.)

Even in stents, which could represent a third major business line outside of urology and anesthesiology, Rüsch will search for a smaller niche to avoid going head-to-head with larger competitors, and may even work with others to get to market, since the applications go beyond its core areas, in order not to lose focus. Rüsch could develop a coronary stent as good as any on the market, says Sodha. "But in order to really make money, you have to invest a lot and that would take resources away from the urology and anesthesiology businesses we're in," he says. Instead, Rüsch is focusing on vascular applications, including bilary stents, and has begun to talk with other, large device companies about partnering to bring its stent to market. Describing a strategy built on small, sustainable niches, Sodha notes, "We won't attack the US market by trying to offer a full bundle because, frankly, we don't have one."

But Rüsch's niche approach is nothing compared to that of its sister company, Weck, which has built its business largely on the back of a single technology: manual ligation devices used in surgery.

Weck wasn't always so narrowly focused. It began in the late 1800s like many surgical instrument companies, relying on the skills of trained German craftsman, and continued primarily as an instrument business after the Second World War. In 1972, the company was acquired by ER Squibb Inc., at the time one of the most broadly diversified medical products companies.

In the early 1970s, as Squibb divested a host of nonmedical businesses, including BeechNut gum, Charles of the Ritz, and Yves St. Laurent, to focus on medical devices, it moved Weck to North Carolina. In 1980, Weck was doing around $45 million a year in surgical instruments and some related medical disposables; by 1987, sales had more than tripled, to around $140 million, largely through a series of acquisitions, and, in the process, the company was split into two different selling operations.

In 1990, a year after Squibb merged with Bristol-Myers, Weck's two businesses were merged with two other BMS device businesses to form a new division, Linvatec (now part of Conmed Corp. ), created to capitalize on the then-boom in minimally invasive surgery. "We were huge," recalls Weck VP of Sales, Tom McManus, who joined the company in 1980. "We had 18 regions, 18 regional sales directors, and around 200 sales reps. But it only lasted two-and-a-half years."

Though Weck had developed one of the first hand-held instruments in minimally invasive surgery, as Linvatec grew, BMS officials no longer saw a fit for Weck's line of surgical instruments, skin staplers, electrosurgery devices, and manual ligation systems. For Teleflex, looking for a follow-on acquisition after its purchase of Pilling, Weck made a lot of sense. "We had truly paralleled Pilling for years," notes McManus. "In cardiovascular devices, they were the stronger house, while in manual ligation, we were stronger." By 1992, Teleflex folded Weck into its existing surgical instrument business, calling it Pilling Weck.

Shifting From Manual to Automatic

The opportunity to acquire a small, but important line of manual ligation devices from a Colorado company called Horizon, led Teleflex in 1997 to split off Weck's ligation systems businesses into a separate company focusing on wound closure. Today, Weck's business is made up almost exclusively of ligation devices and related lines, particularly manual systems where it holds a commanding share of the US market.

Introduced in the early 1960s, ligation devices, an adjunct to suturing in some surgeries, actually proved a difficult sell in the beginning. First-year sales were $96,000 and actually declined to $90,000 the next year. The reason: surgeons, particularly older ones, scoffed at the idea that they wouldn't have to suture. "When you walked into a doctor's office and told him that he wouldn't have to tie anymore because you have a metal clip that he can use, he laughed in your face," recalls Tom McManus.

It took nine years to reach $1 million in sales, but the business started to take off, particularly after the introduction in 1976 of a new program under which Weck gave away the clip applier and only charged for the metal clips. Indeed, the number of metal clips sold each year is enormous—around 150 million last year alone, notes Stephen Holmes, Weck President, who joined the company three years ago, having most recently run a small Atlanta-based minimally invasive surgery company called Solos Endoscopy. By 1985, Weck was doing $30 million annually in manual ligation sales, with the dominance of its Hemoclipbrand clearly established. (Weck also markets a line called Hemoclip Plus, which features an easier loading system, and its Horizon line remains a strong second brand for Weck.)

So strong is Weck in manual ligation that when US Surgical tried to enter the market five years ago, it didn't make it. But dominating a segment just under $60 million is a double problem: not only is the segment small, but with more than 70% market share, there isn't much room for growth. That's why Weck has begun to make an aggressive push into automatic ligation systems, with its new Hem-o-loksystem, which it hopes will become a platform to launch a much larger business. Says Stephen Holmes, "We're on the cusp of Hem-o-lok being our leading product."

Weck will play in the automatic market with a polymer-based clip that differs from the absorbable clips available from Johnson & Johnson 's Ethicon Inc. , the current market leader in automatic ligation. Coming late to the game, Weck surveyed surgeons and nurses to find out what they didn't like about absorbable clips and found that one-third of surgeons thought they were bulky and not secure enough on the vessel, notes Holmes.

Weck officials believe Hem-o-lokhas an edge over other automatic systems, not just in its polymer material, but also in a special hinge-based delivery system, which prevents clip slippage and ensures security. But establishing a presence in automatic ligation won't be easy. While Weck once successfully held off a challenge from US Surgical, a move into automatic ligation again brings it head to head with US Surgical, as well as with Ethicon, in a product area in which each already has a substantial business.

McManus argues that "there will always be a market for manual ligation," and Weck's success there seems assured. Still, the importance of automatic closure is clear: at nearly four times the manual segment, or $250 million, automatic ligation represents an obvious, and perhaps the only, growth opportunity for Weck. "Between metal ligation and stapling, we operate in a worldwide market that is about $350-400 million," says Stephen Holmes. "Once we launch Hem-o-lok, suddenly we'll be competing in a market that is about $800 million, which gives us a lot more opportunity for growth."

Of course, Weck doesn't need 70% market share of the automatic segment, or even half that, to have a meaningful impact on its sales. And, notes Holmes, while surgeons use fewer clips in automatic systems than manual, the automatic systems are priced substantially higher than the manual, meaning a conversion of existing customers brings a nice premium. Indeed, that's Weck's hope: that surgeons who grew up using Weck manual systems will gravitate toward a brand they know and respect.

Finding Niches

But even a successful expansion into automatic ligation devices may not be enough for Weck. Holmes concedes that "there are other products in the marketplace that may, in fact, offer some alternatives to ligation in five or ten years," most notably electrosurgery and sealants. "Today, they represent a fraction of the market, but we expect they're going to have a meaningful impact." That's why Weck officials have added products to their line over the years—including an external skin stapler, to close the long incisions that come with coronary artery bypass graft surgery or orthopedic procedures as well as products that compete in the nascent hand-assisted surgery market—and why they're closely looking for new products and acquisition targets to bolster their portfolio.

Rüsch, too, over the past several years, has added products to its existing line, including some regional anesthesia products it acquired from a German company, Medimex GMBH & Co. KG, and a line of catheters and pump sets for pain control that it licensed from I-Flow Corp. It also recently signed exclusive distribution agreements with two US companies to sell their products in Europe—all playing in niches Rüsch is already focusing on.

Rüsch hasn't always been so focused. In the years after 1993, "we had gone in many, many directions," notes Sodha. "Whatever became available we took and so we got into a lot of different businesses." But it soon recognized that simply adding lines didn't help. "We began to lose a sense of who we are and what we're doing," he goes on. More recently, Rüsch has spent as much time selling lines and businesses as acquiring them—including latex gloves, cleaning supplies, and wheelchairs—all in an effort to build defensible niches in select markets, a strategy characteristic of Teleflex's overall approach to the market. "We have said that our future focus will be on urology and anesthesiology and we'll get rid of everything which is not core to our business," he says. That's not to say Rüsch won't go into new markets, Sodha adds. "But we'll only go into new businesses that are focused niche markets, like the Polyflexstent."

Indeed, with holdings in urological and anesthesia supplies, surgical instruments, and closure devices, Teleflex might be characterized as a diversified medical device company or, at minimum, a broad-based hospital supply company. But Teleflex officials reject such a broad characterization. "We used to tell ourselves that we were never going to be a high tech medical company because we didn't have the development resources, but where we are good is in a product technology [i.e., its core polymer-based materials] that accesses the human body," John Sickler explains. Even as it expanded beyond the applications of that polymer per se, into, for example, Pilling's metal-based instruments or Weck's manual ligation device, he goes on, "you're still accessing the body, but with different materials."

The Mid-Sized Dilemma

Further pushing a niche approach, at least some of Teleflex's growth strategy is predicated on finding opportunities in industry segments other than hospitals, most notably home health care. "We do so much business in the hospital," Sickler goes on. "But we now also have a fair amount of business in alternate sites."

Such a growth strategy makes sense given both Teleflex's material expertise and larger industry trends. But it also reflects a reality about companies like Teleflex and the growth constraints they face. Teleflex's move into alternate site is driven not just by a shift in care patterns, says Sickler, but also because the company believes it'll find it an easier market in which to grow. "It's a more splintered market," he says. "People ask us all the time how we can be competitive at our size, given all of the consolidation that's taken place, and it's in areas like this that we can compete."

That means finding niches that medical device giants like Johnson & Johnson or, more aptly for Teleflex, Tyco either overlook or in which they have no natural advantage. "Right now in Europe, Rüsch has excellent market share in many of the urology and anesthesia markets it serves and Weck has the leading share in manual ligation," notes Sickler. "And that's the philosophy we'll follow as we build our business."

But as Teleflex grows and becomes more successful, such a strategy becomes more difficult. It's the dilemma of the mid-sized medical device company, firms with substantial sales well beyond those of any small start-up, but increasingly dwarfed by the industry giants who are, themselves, continuing to grow by acquisition.

Part of the challenge comes inherently with growth: as Teleflex grows from $150 million to nearly $450 million, adding a $20 million product line no longer achieves growth targets.

But industry consolidation has made continued growth even tougher. "The challenge for us today is that we have to look at bigger niches both in order to meet our growth goals and to continue to be able to compete with the larger organizations in this marketplace," says Sickler. Tyco's acquisitions in recent years of CR Bard and Mallinckrodt [See Deal], [See Deal] both offer striking examples of consolidation at work and, in Teleflex's case, have ringing significance because Rüsch competes directly with both companies. (Weck, too, competes with Tyco in its US Surgical business.)

Indeed, it's precisely companies like Teleflex and its various operations that find the current environment so challenging. The advent of hospital cost containment in the mid-1970s would prove to have enormous consequences for all product companies except the smallest, most innovative technologies. The shift from cost-plus reimbursement to prospective payment heralded a new era for hospitals, one in which how they bought their products became almost more important than what products they bought.

The rationalization of purchasing, focusing on process efficiencies and the value of logistical delivery systems, brought a new kind of discipline to ordering and product selection and, in the process, shifted the locus of vendor selection from local to national. Hospitals, which once purchased almost exclusively as independent entities, began to gather, slowly at first and then more consistently, into large, national organizations that challenged historical vendor/hospital relationships and loyalties. Smaller suppliers felt the pressures most acutely, as these large groups gravitated toward large, market share leaders and scooped up once important customers into their nets.

Finally, in their effort to reduce costs, these national companies brought price and margin pressure on suppliers that made the entire hospital supply market less profitable. On- or off-contract, many suppliers simply found it harder to stay in the game. As the 1990s went on, other pressures added to the burden suppliers felt, some directly, some indirectly: continued consolidation on both the supplier and customer side and the clear advantage that at least some suppliers gained from a stock market that rewarded only the largest, most profitable companies.

Get Big or Get Out

As noted, all suppliers have found the market more difficult as a result of the changes that cost pressures brought, but none so much as mid-sized companies. Why has it been so hard for these suppliers to survive? Why has the device industry so clearly split into two camps, with giant, multidivisional companies on one hand and small start-ups on the other, with few companies in this vast middle territory?

Ray Larkin understands the plight of mid-sized companies. A seasoned and highly respected executive, Larkin ran pulse oximetry leader Nellcor through its merger with Puritan-Bennett (PB) in 1995 [See Deal] until its acquisition by Mallinckrodt in 1997 [See Deal]. Today, he serves as an advisor to and board member for companies large and small and has seen first-hand the challenges mid-sized companies face.

Larkin notes that for such companies sustaining growth has become very difficult. He says that "when companies get to a certain size, they have choices to make," about how and where to go to find continued success. The choices and inflection points aren't much different today than they were several years ago, he argues: "But the universe of options regarding what you can do is smaller. So you have to be more careful, more thoughtful about your strategy."

Larkin points to his experience at Nellcor. In the early 1990s, Nellcor was doing around $240 million in sales a year, very profitable with a lot of cash. And its investors wanted the company to sustain the 25% growth levels it had achieved as it ramped up adoption of its pulse oximetry devices.

"We sat down and, over the course of a year or so, took a look at what our options for growth were," Larkin recalls. Though Nellcor eventually decided on a merger with PB, he notes that "there were a number of companies, half a dozen or more, the size of PB, doing similar things." And that doesn't even take into account companies in allied fields, such as respiratory disposables. "We drew up a list of companies we could look at, from the very small to those over $400 million," he says. "And the list was several pages long."

Today, by contrast, says Larkin, "if we were to put together that same list, it would fit on one page, and most of the companies would be small. There'd be very few $400 million companies because they've all been bought out." To some degree, the rigors of competition have weeded out a lot of companies, forcing them either to become significantly larger through acquisition or to be acquired themselves—the merged Nellcor/Puritan-Bennett was eventually acquired by Mallinckrodt which, in turn, was taken over by Tyco.

But Larkin notes that as the hospital marketplace wrestled with cost pressures, it also pushed companies toward what might be called a get-big-or-get-out strategy. "The marketplace clearly wanted consolidation," he says. "Ten years ago, 75% of the companies in this industry had 50 employees or fewer. That's not very efficient: it costs everyone a lot of money, and technology doesn't get where it has to go."

For these and other reasons, few members of the next generation of device companies have done what Nellcor did, which is to evolve into a $250 million, mid-sized company. "It's hard for companies to break through today," says Larkin. "The marketing challenges, the technology and reimbursement challenges—just the competitive challenges make it so much more difficult because customers are so much more discerning and discriminating about what they buy, why they buy, and what they pay for it. The process for companies to get from point A to point Z is much, much longer and takes a great deal of focus and effort and a lot more patience than a lot of companies are willing to put up with."

And the very fact that the number of mid-sized companies is dwindling further increases the challenges, creating a vicious cycle: with no mid-sized companies to acquire, growth has to come incrementally through acquisition, if it comes at all. "That's why a lot of mid-sized companies are themselves going to J&J or Medtronic or other large players," says Larkin.

A Corporate Umbrella

Larkin is sympathetic to the challenges mid-sized managers face. One strategy, he notes: go after every other company in your niche, whether European or domestic, around $10 million or $15 million in sales, and roll them up. "That's as hard or harder than managing a start-up," he says, "because if any one of them falters, it hurts. Your whole financial structure changes, unless you're already $1 billion." Such a strategy takes not just a comprehensive knowledge of your marketplace and customers, he says, it also takes a different kind of management approach. "You need the talent, desire, and interest to really dive into this," he says. "You have to really care about some very small devices, or don't bother." Ironically though unintentionally, Larkin is describing Teleflex and its diverse businesses: Weck aside, how many companies today can really get excited about manual and automatic ligation devices?

Though the company name barely registers with most medical device executives, company officials insist that Teleflex deserves a spot on any list of the 40 largest companies in the industry. "We're somewhere near the bottom and far from the first two or three on the list," says John Sickler. "But we're there." Moreover, Teleflex officials routinely track the financial performance of their medical business, in terms of sales, profits, and operating margins, against a handful of other device companies, including Arrow International Inc. , Datascope Corp. , Mentor Corp. , Respironics Inc. , and Conmed—companies with similar products lines and comparable market caps and revenues. "We feel good about where we are, top and bottom line, in comparison with those companies," Sickler goes on. (Teleflex's operating margins still trail the group average, 14.5-17%, and improving margins remains a goal of the company.)

Still, even Sickler concedes that "many people don't know who Teleflex Medical is," and he cites corporate identity as one of the company's key issues going forward. Chris Tihansky, Teleflex Medical Group's VP of business development, has experienced the problem first hand. "I've been at health care investor conferences and gone up to people I've known for years," he says. "And when they say, ‘What are you up to these days?' and I tell them I'm working for Teleflex, they say, ‘Hmm. Doesn't ring a bell.'"

Rather, it's the individual company names, Pilling, Weck, and Rüsch, that register—company officials note that while Teleflex has been around 58 years and its medical operation 16 years, each of Teleflex's three leading brands have, on their own, more than 100 years behind them. Stephen Holmes notes that Teleflex "is small in the arena of medical device companies, but the one thing it has going for it are its names—whether that's Rüsch in urology and anesthesiology, Pilling in vascular and ENT, or Weck in general surgery," he says. "There isn't a surgeon in the world who hasn't been trained on our clips. Whether they're 25 or 65, they know our name, and that gives us credibility."

Thus Teleflex's challenge: how to create an umbrella identity that conveys some sense of size and scale while, at the same time, retains the value already existing in the company's core brands. "The key questions," says Sickler, "are ‘Who are we to the rest of the industry? And who are we to the people inside the organization?' For the moment, we know we have a problem with our identity."

Interestingly, in many respects, it's the challenge that Teleflex's two main competitors wrestle with, though in different ways: both Tyco and Johnson & Johnson parlay strong brand identities in individual product lines while deriving benefit from a broader corporate identity. Albeit on a smaller scale, Teleflex hopes to duplicate what J&J and, in particular, Tyco has done in supporting individual brands with a more efficient infrastructure. "What we want to do is to take resources from the back end of the business—manufacturing and inventories and things like that—and transfer them to selling activities that build brand recognition," he goes on.

Indeed, though acquisitions will be important, Teleflex officials are counting on such a strategy to help each of the company's main device businesses grow on their own, by finding larger niches within businesses in which they already have a stake, but without having to add entirely new businesses. Thus, Weck will grow not by expanding significantly beyond wound closure, but by migrating from manual ligation, currently a market doing around $60 million in the US, to automatic ligation, which is nearly four times that size. Rüsch, for its part, will expand from the global intermittent catheter home care market to a broader home urology market, a shift from a $160 million market to one closer to $600 million in size.

"We want to spend more time on sales, distribution, and product development activities that funnel organic growth opportunities," says Sickler. Teleflex's next acquisitions will likely be larger than those of the past several years, if only because each of its businesses is getting bigger. But company officials insist they had no real interest in significantly ramping up their medical business by buying a very large company, such as CR Bard, which wouldn't so much have expanded the company as completely overwhelmed it. "We'll definitely add more brands," says John Sickler. "But they'll fit with our existing businesses." A case in point: KMedic, a small (less than $20 million) specialty orthopedic instrument line that the company acquired in 1999.

Refreshing the Brand

For companies like Teleflex, the goal isn't to compete on an equal footing with the industry giants, but to formulate a different, but no less sustainable strategy as a mid-sized player. "We've felt for the last several years that there's no way we can compete with the giants because we'll never have the breadth of product line that they do," says Sickler. Instead, Teleflex will focus on "niches in which we can have meaningful market share."

As noted, as Teleflex gets bigger, so will the niches the company targets. Manual ligation is an important line for Weck, but at $60 million dollars and with clear market leadership, the question is, where can Weck go from there? The answer is automatic ligation. Similarly, Rüsch's goal is to grow "by adding whatever we don't have to become a complete supplier in anesthesiology and urology," notes Frank Sodha. "Having a niche strategy doesn't necessarily mean you have to stay a $200 million company."

As noted, Teleflex isn't counting on dominating these larger niches the way it does, say, manual ligation. "But on a relative basis, our expansion opportunities are hugely attractive," says Sickler. That shift from small niches to larger ones underlies Teleflex's broader strategy. "If we've been in markets that were $100-200 million, we're now going to go after some that are $200-400 million," he says.

"Our philosophy is to stick to what we're really good at, what we're known for all over the world," says Frank Sodha. "For us, that's anesthesiology and urology." But to expand those niches, building and refreshing its brands becomes critical, even more so than acquisitions. Just because a brand has been around for 100 years, however, doesn't mean it'll be around for another 100 years. Like any other business, the history of hospital supply is filled with names of companies that once dominated their segment and now no longer exist: who today remembers once powerful names like AS Aloe or American Hospital Supply?

The simplest way to extend the life of a brand is through the kind of product innovation that reinforces the company's name with surgeons and physicians. "Even today," notes Tom McManus, "you'll hear a surgeon in the OR say, ‘Get me the Hemaclip,' even when they use a competitive product." And whether it happens or not, McManus hopes that surgeons come to make the same kind of immediate association with Weck in automatic ligation that they currently do in manual.

But creating meaningful product innovation isn't always easy, particularly in the market segments that Rüsch, Weck, and Pilling play. For one thing, those products provide important tools to physicians and surgeons, and enhancements make the physician's task easier. But unlike product innovations like drug-coated stents, they don't solve major unmet clinical needs.

If anything, economic pressures work against the perceived value of new product development, particularly as customers, large and small, seek to deny the value of product enhancements in an effort to gain pricing leverage. That means that, in addition to product development, Teleflex will be looking at other ways to enhance their brands, which are as likely to include service as product enhancements. "We're redefining how we get our product to market, how we provide a different quality or customer service level, how to provide some value-added," notes Chris Tihansky. "Sometimes that's product innovation, sometimes it's service." Adds John Sickler, "In the past, product development was key in surgical instruments; today, it's not. You need to do something to renew the brand in the customer's eyes, and it's going to be different in each of our product lines."

Leveraging strengths across the individual brands is another way Teleflex might bring added value. Weck's Tom McManus notes that all of the marketing executives of the various Teleflex Medical divisions got together in early August to explore potential collaborations. "We brought together all of the sales and marketing department heads and our field managers to determine who we are and what we want to be," he says. "Do we want to be Pilling, Weck, and Rüsch as separate companies? Can the Rüsch rep open the door to accounts where he has better relationships? Can we open the door to him in those accounts where we're stronger? Is there an advantage to being Teleflex Medical? We're trying to pull that together now."

At War With the Elephants

Teleflex will, where possible, leverage the selling clout of its combined businesses. Stephen Holmes notes that in every country in the world except the US, Pilling and Weck operate from a single organization, such as Pilling Weck Franceor Pilling Weck Asia. In many countries, all three lines, Pilling, Weck, and Rüsch , are sold through a single organization.

But, particularly in the US, such opportunities are limited. A combined Pilling and Weck, merging surgical instruments and wound closure, would seem to make a lot of sense, but, says McManus, the actual sales call points are quite different. Weck's "main thrust and emphasis is in the operating room, and our sales reps spend a good part of their day demonstrating their products to surgeons," he says. Pilling "deals more with the OR supervisors and administrators and materials managers."

Indeed, in the early 1990s, Teleflex tried to have Pilling sell some Weck products in the US, only to quickly realize that their customers weren't the same. "We didn't get there, and that was a learning experience for us," notes John Sickler. That's not to say that Teleflex, as a corporate entity, doesn't have value for its individual businesses. Frank Sodha points out that the acquisition of Rüsch by Teleflex gave Rüsch the resources and the mandate to grow aggressively for the first time in over 100 years. "In the past, Rüsch's attitude was, ‘Don't worry about growth, we're making more money than the family can spend,'" he recalls. Rüsch officials rarely worried about markets in the US, Japan, or, frankly, even outside Germany. "Suddenly we became a more dynamic company and everyone knew it," he goes on. "Customers saw that we were buying businesses and bringing more products to market."

Still, in serving those customers, Teleflex's best chance for success lies in the opposite direction of an aggressive leveraging or bundling strategy, which would only place it at a greater disadvantage to competitors like Tyco and J&J who can easily counter with broader, more robust product groupings and more aggressive economic deals. Rather, companies like Weck and Rüsch win in the marketplace the more customers unbundle product selection—the more individual surgeons and physicians are free to influence product selection in ever narrower and more specific technology niches. As the revenue and resource gap between mid-sized companies and their larger competitors grows wider, so does the strategic gap. Strategies that are central to large companies—most notably national hospital group purchasing—become irrelevant for many small or mid-sized companies, either because their product niches are too small or because they lack the market leadership that GPOs need to sell to a broad constituency.

Significantly, such market dynamics often push mid-sized companies toward a more conservative or traditional business model, one that rests on narrow product niches, the value of technology enhancements, and close relationships with end-user customers. Both Weck and Rüsch are counting on growth coming from their ability to sell new products to historically loyal customers, while minimizing, to the extent possible, the threats of national contracting and supplier standardization that so benefit market leaders. John Sickler concedes that several years ago, when group contracting emerged as a major issue for hospital suppliers, Teleflex simply couldn't compete. "We had to be creative with our sales tactics, to stay below the radar screen, and get into the hospital on a direct basis because there was no way we'd ever have as broad an offering as some other companies," he says.

That's why Teleflex turned to alternate site markets and, in particular, narrow, specialty-driven market niches. If anything, company officials believe the hospital marketplace is returning to a more clinically driven dynamic. "It's better today than it was," says Chris Tihansky. "We see the pendulum swinging back as the clinical side regains some influence." Stephen Holmes agrees. Asked how much of Weck' business is done on national contract, he responds, "Fortunately, not much." Though Weck is targeting integrated delivery networks (IDNs), company officials believe large-volume contracting simply won't play a significant role as they go forward. "We've seen with Hem-o-lokthat surgeons still have a lot of say as to what goes on in the OR," says Holmes. "We really want to maintain our positioning as a specialty product. We think doctors should and will make the decision [about what product to buy]."

Within the broader corporation, while Teleflex has a limited number of contracts with leading GPOs, contracting per seisn't central to the company's strategy going forward. "We do play that game," adds John Sickler. "But for the moment it's not a large share of our business. For us, that would be like going to war with the elephants. It's tough to win." Still, the growing influence of GPOs generally, and their irrelevance to a company like Teleflex raises an interesting question for mid-sized device companies: exactly how do they survive? In an era when GPOs gravitate toward fewer vendors and market share leaders, why would any customer buy from Weck or Rüsch when they could buy the same products from J&J or Tyco, particularly given the essentially commodity-like product areas in which they play? "It's an interesting question," Frank Sodha notes and one Teleflex officials have spent the time to address.

Indeed Rüsch officials recently surveyed customers and asked them pretty much the same question. Low prices, the result of efficient manufacturing, and a reputation for high quality that comes with German sourcing were cited by some customers. But what Rüsch officials found is that the staying power of companies like theirs is built on several principles. First, strong relationships with customers, particularly clinical thought leaders, built up over many, many years—in effect, says Sodha, Rüsch's strong brand brings customers back time and again because it's a name they recognize.

Related to that is that many mid-sized companies still offer these customers extremely high service levels—again, a legacy of their long histories in the business. "Rüsch always had a reputation of doing everything for everybody," says Sodha. "If a doctor in the US has an idea for a product, we'll try to create the product or help him explore the market potential, even though other companies may not think it's a good idea." Rüsch has to be careful not to take that attitude too far, he says. "But we still tend to do that," he says, while larger competitors "won't touch it because it interrupts and changes all of their processes."

Such factors make mid-sized companies like Teleflex, particularly given its niche strategy, viable despite all industry trends to the contrary. "Look at Porsche," says Sodha, by way of comparison. There are other companies that make cars just as good, if not better, he argues, "but people continue to buy a Porsche because it's a brand they know and see as special." Despite the trend toward consolidation and more broad-based, critical mass suppliers, says Sodha, "there's enough space for companies of our size to survive because this will always be a niche business."

At a Strategic Crossroads

Even as they focused on improving the profitability of their medical business, Teleflex officials couldn't help watching the second half of the 1990s with some anxiety. "It was a hugely frustrating period for us because so many of the larger players had tremendous paper and huge multiples [in their stock prices] and were using them to their advantage," notes John Sickler. "And here we were, as Teleflex, with an industrial-company multiple, saying to ourselves, ‘We'll never be able to play that game.'"

Private equity investors, too, ramped up competition for companies, since they often could ride through a period of less than stellar returns while helping to turn around their acquisitions. As a public company, says Sickler, "we had to meet the annual growth goals on behalf of our shareholders." Teleflex officials felt "stymied in the marketplace because of the valuations," he says, and wondered whether they had wandered down the wrong path. But in the last year or so, he goes on, "The tide has turned, and we think we're in a different position."

For all of his talk of the value of Teleflex's brand and market niches, John Sickler understands the challenge the company faces. "We're at a strategic crossroads," he says. "We have to be larger if we expect to build a global business and remain competitive. We need to be a billion-dollar company [i.e., in medical devices alone]." Indeed, the choice for Teleflex was "to get in or get out," he says, start acquiring or be acquired.

And he acknowledges that incremental deals won't get Teleflex where it wants to go. "To be doing $5-10-15 million deals will not get the job done for us," says Sickler. That's not to say Teleflex won't do those deals selectively, particularly where they bring an obvious value "We're going to continue to expand our product offerings in places where we already know the market," he goes on. "But we also have to do some things differently in terms of size if we're going to meet our growth expectations." Do the math: growing 15%, top line, over the next 5-6 years would put Teleflex right on target to reach somewhere between $900 million and $1 billion at the end of that time, a goal that would, says Sickler, "make us a formidable competitor in the marketplace."

Speaking of that time a few years ago when Teleflex largely sat on the sidelines, John Sickler concedes, "There's no doubt in my mind that we missed opportunities," though he argues that there continue to be significant acquisition opportunities for a company like Teleflex. "And we're counting on some of that to be part of our future."

Indeed, Sickler is confident that Teleflex will capitalize on the opportunity. He concedes that in the past, Teleflex hasn't always gotten access to the right deals. "When we were looking at smaller deals, many of the investment banks passed us by because they don't have the time to do small deals," he says. Moreover, Teleflex's identity as a diversified industrial company may have caused some to overlook them as prospective acquirers.

One of Teleflex's challenges is to convince the industry that they are a viable player and ready to do such deals. Asked if Teleflex's board is now ready to make the kind of aggressive push that they shied away from just a few years ago, Sickler responds, "We've had healthy discussions recently that included strong enlargement of our base. What I can tell you is that it's up to the management here to put the appropriate opportunity in front of the board and to answer their questions regarding shareholder value."

A Staying Power Beyond All Reason

While the challenges facing mid-sized companies are great, it seems overly pessimistic to argue that extinction is inevitable. For a variety of reasons, well-managed companies committed long-term can survive, even as they're squeezed by ever larger competitors on one hand and ever larger customers on the other.

If anything, the consolidation that has so plagued mid-sized companies may now begin to work to their advantage. As companies like J&J and Tyco continue to put distance between themselves and everyone else, their own growth demands increase, making it harder to do small deals—not just in terms of acquiring other companies, but in serving certain segments of the market as well.

Teleflex officials don't deny that the deals Tyco and J&J have done over the past couple of years have raised the bar for Teleflex. "There's clearly a pressure that drives us to increase the size of the niches that we're looking at," notes John Sickler. Stephen Holmes agrees. Teleflex's billion-dollar goal is more important to corporate headquarters than to individual company managers because it will establish Teleflex's bona fidesas a health care company and help it to get to the P/E ratios of health care companies. But Weck needs to get bigger as well, though for different reasons. "We need to be a larger critical mass and have greater revenues to make larger R&D investments to bring new products," he says. And to get that "it's going to take some acquisitions, because we're not just going to grow internally." Holmes notes that drug-coated stents will likely be a billion dollar-plus market overnight. "That's not the kind of product we have," he says. "We're fortunate if we have a new product that does $3.5 million in its second year."

At the same time, it's precisely in the smaller niches that Teleflex finds so attractive that the larger companies have the most trouble, because they've virtually outgrown the business. "When you're $450 million rather than $10 billion, it's a whole other ball game," says John Sickler. "Because of our size and the relative size of others, we've had significant success in picking up pieces of business that fall out from these larger transactions." In fact, in one European account last quarter, 25% of Teleflex's anesthesia business "came as a result of these larger transactions," he says.

In many cases, Teleflex's larger competitors won't or simply can't battle the company in its smaller accounts and lines. Stephen Holmes is realistic about Weck's competitive clout. Though it has 71% of the manual ligation market, "if Ethicon really wanted it, based on their marketing strength they could take the majority share position overnight," he says. "But they'd rather focus on the automatic market, which is five times larger." Frank Sodha agrees. For Rüsch, four of its leading competitors—Mallinckrodt, Sherwood-Davis & Geck , Kendall, and Bard—have all become part of Tyco over the past several years. But rather than feeling overwhelmed, Sodha is optimistic. "There's still a lot of business left on the table for us—we're very encouraged about our future," he says.

In fact, there may be more business for Rüsch than in the past, Sodha insists, because a lot of the acquisitions that a company like Tyco does are "driven by capturing market share, and as a result, we don't see them investing a lot in R&D—if they want to add products, they're more likely to just go buy another company." Teleflex's niche strategy may not keep pace with its bigger competitors' breadth-of-line strategies, he insists, but it has made Rüsch more competitive within selected niches. As a result of that focus, he goes on, "all of a sudden our range of urology and anesthesiology products are becoming far more competitive."

In many respects, Teleflex officials see themselves as a kind of smaller Tyco—a company trying to manage a more efficient cost structure while appealing to individual decision-makers. But just as certainly, they understand that such comparisons grow less apt the bigger Tyco gets. "We're so small," says Frank Sodha. "And the bigger they get, the smaller we get in perspective. There are a lot of products we're in that they're not interested in, where we're not even on their radar screen."

Indeed, the pressures on big companies may even be greater than on mid-sized, particularly when it comes to sustaining growth. It's a cautionary tale of the mixed blessings that come with size that the largest, most dominant hospital supply company of the 1970s, American Hospital Supply, didn't even survive the 1980s. For all of its challenges, Teleflex had, arguably, a better run over the past two or three years than either Mallinckrodt or Bard, neither of which survived the pressures put on them to grow and increase shareholder value, if only because it's still standing.

Certainly, the attrition among mid-sized companies over the decade has been notable. But just as certainly, the few that remain have discovered a staying power that seems to defy logic or reason. In a marketplace in which larger competitors outspend them in R&D several times over and customers gravitate toward huge, national groups, which, in turn, favor market leaders and shun trailers, mid-sized companies like Weck and Rüsch continue to develop innovative products and to find customers that will buy them. The skepticism or cynicism that envelops companies like Weck or Rüsch when talking broadly about industry dynamics seems to evaporate when the analysis bores down to specific product categories. "Look at Pilling—they're 180 years old; we're 120 years old," shrugs Tom McManus. "Our focus on niches has kept us going."

Moreover, mid-sized company managers like Stephen Holmes argue that while they may not have the critical mass of a J&J or Tyco, neither are they untested in the market like so many start-ups. "We may not compete in high profile areas like interventional cardiology, but in fact, we do compete in a number of markets that, collectively, represent $800 million a year, and we can maintain a good share of those markets," he says. "We're far from a boutique company."

For that very reason, even some investors are beginning to discover that mid-sized companies can be a platform from which to create significant value. (See "Building Platforms in Orthopedics,"IN VIVO, September 2001 [A#2001800179.) And mid-sized companies have learned to survive not through financial sleight of hand or a radical reformulation of business models, but by applying traditional, even conservative models based, most importantly, on providing high levels of customer service and innovative products with meaningful differentiation to physicians and surgeons.

Industrial Strength

Thus, if Weck is successful with its Hem-o-lokautomatic ligation device, that success will come by convincing surgeons that Weck's device is better than its competitors. Musing over the question of how companies like Weck survive against the likes of J&J and Tyco, Stephen Holmes argues that if Weck couldn't offer "something with a discernable difference, a real advance over what everyone else has—if we were just relying on our metal clip business, Ethicon would continue to dominate. But if we have something that is truly of value to surgeons, something that fills a need by reducing operating time and saving them money, something that the doctor feels has to be part of his armamentarium, we can go head to head with them."

That means that Weck's products can't be perceived as me-too's, products that do the same thing as, but perform no better than those offered by Weck' larger competitors. "With technology that's been on the market for more than a decade, you're no longer talking about something that's perceived as an innovation," notes Holmes. "If we don't have some distinct advantage with our Hem-o-lok[polymer] clip, if we had come out with just another automatic metal clip, we'd never be able to compete against Ethicon and US Surgical."

Still, to say that Teleflex is focusing innovative products differentiated enough to be driven by surgeon preference isn't the same as saying that it is counting on the kind of technological breakthroughs that VCs and start-ups bank on. Indeed, Teleflex officials know they can't survive a technological arms race with their much larger rivals. Rather the distinctive strategy of mid-sized device companies is one that embraces both differentiated technology and the sustained influence of individual physicians in product selection and, at the same time, acknowledges the cost and economic pressures that big companies, particularly companies like Tyco, address so effectively.

In promoting and enhancing the value of its individual brands, Teleflex officials support and encourage a more traditional, clinician-driven marketing effort that relies heavily on each individual business playing to its individual strengths. But they also expect to find a common ground for their various businesses in an effort to leverage the corporation's industrial expertise to create more cost-efficient businesses. "It's one thing to be able to buy companies and grow the top line," says Sickler. "It's another to recognize that you need a new business model and you need to be more effective at delivering a more cost-efficient product offering."

Sickler argues that despite the pressures for innovation, technology adoption has slowed and some of Teleflex's larger competitors have experienced growth problems because "in the end, hospitals and end-users still take the attitude, ‘You may have the greatest product in the world, but if it costs more, I'm not interested.'" As that process continues, he goes on, Teleflex, with its industrial expertise should have an edge. "Over the next five years, we believe there's a specific challenge to continue to grow the business but change the business model to become more efficient and take cost out of the structure," he says. "We think that given our corporate structure and our industrial experience, that plays to some of our strengths."

As Teleflex Medical nears its billion-dollar goal, it will likely begin to reassess a strategy built on market niches, even expanded ones. Frank Sodha, who would always like Rüsch to be 50% or more of Teleflex's overall business, acknowledges that when Rüsch gets to be $500 million, "we'll have to rethink our strategy." But for now, he and others at Teleflex believe in the implicit soundness of a niche strategy. "In order for us to get to that size," he goes on, "we should concentrate on what we're good at and not gamble with anything else."

John Sickler agrees: "I think for us to say that we want to be a billion dollars doesn't work. We've seen in the past not just in health care, but in other industries that just having a size goal isn't sufficient. If there isn't a mission or strategy of what makes up that billion dollars, then you're just playing a financial game, not building a business." Sickler concedes that Teleflex is still "trying to think through" issues such as brand identity, core competencies, and the value of the Teleflex name. But he adds, "We think there's an opportunity for a more lasting period of time for us to grow."