American Medical Systems' Make Over

The sale of American Medical Systems to private equity investor Warburg Pincus started the company on a new path. Long successful in male-focused markets like erectile dysfunction, part of the new direction for AMS entailed a new management team and a reinvigorated product development effort. But in AMS's case, the development effort was focused not on the company's core business, but in a related area, products to treat female uro-genital problems. Though similar in some respects, the urology and gynecology markets are more notable for their striking differences. AMS's male-oriented lines are market development-driven, aimed at educating and attracting customers among men reluctant to seek care; gynecology is more about product development, getting new therapies into the hands of patients eager to use them.

Long the leader in male-oriented urology markets, AMS is that rarest of breeds: a company that reinvents itself to stay relevant.

By David Cassak

• Part of Pfizer's overall diverstiture of its medical device businesses in 1998, the sale of American Medical Systems to private equity investor Warburg Pincus, started the company, long successful in male-focused markets like erectile dysfunction, on a new path.

• Part of the new direction for AMS entailed a new management team and a reinvigorated product development effort. But in AMS's case, the development effort was focused not in the company's core business, but in a related area, products to treat female uro-genital problems.

• Though similar in some respects, the urology and gynecology markets are more notable for their striking differences. For one thing, female markets tend to be more robust and faster growing, not just because problems such as incontinence are more widespread, but also because, on a level of social dynamics, women tend to be more proactive in seeking treatment for health problems and more willing to talk about those problems with friends.

• For that and other reasons, AMS's male and female businesses differ in another fundamental sense: its male-oriented lines are market development-driven, aimed at educating and attracting customers among men reluctant to seek care; gynecology is more about product development, getting new therapies in the hands of patients eager to use them.

On the cover of American Medical Systems Holdings Inc. 's 2003 annual report, a woman, one of the many patients who have benefited from AMS technology, stands flanked by a dozen or so other people, all AMS employees.

By itself, the design represents nothing exceptional. The woman is posed undramatically, and the notion of paying tribute to both customers and employees is a commonplace of annual reports. But in AMS's case, the picture seems exceptional, if only for one reason: best known for its market leading line of penile implants, products designed to help men who suffer from erectile dysfunction, AMS's customer base has historically been overwhelmingly male. Indeed, today well more than half of the company's sales come from products targeting men in either erectile restoration or incontinence. Still, the annual report picture conveys a clear message: women are and will become an increasingly important customer group for a company once exclusively focused on male markets.

In many respects, AMS is that rarest of corporate entities—a successful company that re-invents itself, in AMS's case in order to keep ahead of demographic and technology trends in its core businesses. Already the worldwide leader in male-oriented urology markets such as erectile restoration and male incontinence, the company four years ago set about to tap into the huge but largely under-penetrated market for female incontinence and related products. In the process, AMS has transformed itself from a sleepy little division of a larger pharmaceutical company playing—and doing well—in a limited number of small markets, into an entrepreneurial force, driven by a powerful product development engine and the marketing clout to open new opportunities in untapped markets.

A Failed IPO, Then a Drug Company Deal

Founded in 1972, American Medical Systems' first product wasn't the penile prosthesis for which it has become best known, but rather a treatment for male incontinence called the artificial urinary sphincter, or AUS. In the early 1970s, a new, surgical approach to treating prostate cancer began to catch on. Performed on men in greater and greater numbers, the treatment was effective in eliminating the cancer but often left patients with nasty side effects, including impotence and incontinence. (In getting rid of the cancer, most surgeons couldn't help damaging the sphincter muscle, which lies just behind the prostate, compromising the patient's ability both to get an erection and control his bladder.)

At the time, Brantley Scott, MD, a urologist, developed the AUS to help his prostate surgery patients cope with the growing incidence of incontinence. By 1973, Scott had also developed a line of penile prostheses to treat prostate surgery's second side effect, impotence, and over the next decade, AMS's erectile restoration business—AMS resists the term "erectile dysfunction" to describe its own efforts, preferring to reserve the term only for the condition it treats—quickly grew, outpacing its incontinence products business. Even today, AMS's erectile restoration business, at around $70 million annually in sales, is twice the size of its male incontinence business.

In 1983, AMS, then still privately held, made plans to go public and had even filed papers with the SEC for an IPO. But a last-minute manufacturing problem, caused by a contaminated component supplied by an OEM vendor, scuttled the company's financing plans. A week away from its public offering and having generated significant interest, AMS was forced suddenly to shift gears. Six months later, it was acquired by pharmaceutical giant, Pfizer Inc. , which was building up a medical device portfolio at that time, a portfolio that would eventually include Howmedica, a leading manufacturer of orthopedic implants; Schneider, a leader in its market as well, of angioplasty products; and Valleylab, an electrosurgical instrument company.

Suffocated Inside a Big Drug Company

Pfizer owned AMS for the better part of a decade and a half, the smallest of four medical device businesses the drug company held through the 1980s and 1990s. Then, in the late 1990s, buoyed by the dramatic success of its pharmaceutical business and following a trend started by other large drug companies, Pfizer began to exit medical devices. In 1997, Pfizer sold Valleylab to United States Surgical Corp. [See Deal] (which was itself later acquired by Tyco International Ltd. ). The next year it decided to exit medical devices altogether, selling Howmedica (now Stryker Howmedica Osteonics ) to Stryker Corp. and Schneider to Boston Scientific Corp. [See Deal]. Of Pfizer's four device companies, only AMS failed to find a corporate acquirer. At the end of the auction process, AMS had been acquired by a group of investors including venture capital firm The Vertical Group and Warburg Pincus, the global private equity investment firm, in a deal valued at $130 million [See Deal].

Richard Emmitt, a partner at The Vertical Group, had followed AMS for nearly two decades when Pfizer announced the auction. As a medical device industry analyst, he had watched AMS grow since the mid 1970s and had sat on the board of directors of angioplasty pioneer SciMed with Robert Buuk, then CEO and one of the founders of AMS. "What I liked about the company was its franchise with its customers," Emmitt recalls. "Every time I spoke with a urologist, I heard the same thing: AMS is a great company with a great sales force and a reputation for strong clinical support, but they're being suffocated inside a large drug company." In fact, he argues, while Pfizer had invested heavily in its other device businesses, he became convinced it hadn't really done all it could with AMS. "What I kept hearing people say was, ‘It's too bad they don't do more than incontinence and penile implants.' "

For Elizabeth H. Weatherman, too, a partner at Warburg Pincus and the head of its medical device practice, AMS was a long coveted prize. "I had my eye on this company for many years," she says. In a lot of ways, AMS reminded her of another investment that had proven successful for Warburg Pincus: Xomed Inc. (now Medtronic Xomed Inc. , part of Medtronic Inc. ) "The model was: look for an orphan division of a major company that doesn't really know what to do with that division," she says. At the same time, the company would ideally have been in business for a while and built up a strong franchise with a core group of physician customers. "I used to trawl the landscape looking for similar opportunities and the one that kept coming up was AMS," she concludes.

Both Dick Emmitt and Bess Weatherman, who have been co-investors on a number of device deals since 1989, agreed that AMS had, in Weatherman's words, "a stellar reputation with urologists—they thought the company was fabulous—but it was such a small business for Pfizer, you had to ask why they ever bought it in the first place." Over the years, Weatherman had asked several times about the possibility of buying AMS, but the word from Pfizer and from investment banks was always no. When Pfizer, on its own, decided that it would hold auctions for each of its device businesses, Warburg Pincus and The Vertical Group jumped at the chance to get AMS.

According to industry rumors at the time, there were early indications of interest in AMS by several large corporations, including CR Bard Inc. , at the time the most logical and, according to some, the most aggressive of Warburg's competitors, as well as Medtronic and Boston Scientific. But at the time of the auction itself, Warburg Pincus may very likely have been the only bidder.

The acquisition was accompanied by charges that Warburg Pincus forced the auction so that competitors wouldn't have time to bid. "Not at all," says Weatherman, who insists that Warburg simply played by the rules Pfizer had set for the auction. "We met or beat every deadline," she adds, though she does concede that when Pfizer sought to extend the auction, "we kind of held their feet to the fire." As far as charges that in their zeal to get AMS, Warburg Pincus and The Vertical Group overpaid, she says simply, "This was the deal we chose to do."

A Kind of Turnaround

For all of its previous success in urology, AMS presented Warburg Pincus with something of a turn-around, particularly given Warburg Pincus's philosophy about how to build a successful device company: combine good management with a robust product pipeline and a strong franchise with customers. "We're not a typical venture investor in devices, always looking for the next one-product-wonder home run," notes Weatherman. "Our philosophy is that if you can dominate a physician subspecialty where the demographics are compelling and you have a new technology, you can create a business that is both valuable and enduring."

But while AMS had some of the components of a strong device play by Warburg's reasoning, it clearly lacked others. One of the most telling statistics at AMS, says Weatherman, was that over the several-year-period prior to the sale, the company had looked at something like 25 potential acquisitions and done only one. "And this was a company whose product pipeline was basically empty," she notes. Indeed, one of the most immediate challenges AMS's new owners faced lay in changing the corporate culture. For years, the company had been run by executives biding their time while on assignment from Pfizer's much larger drug business. Says Weatherman, "We thought it was important to send a signal from day one that this was going to be a different company—this was going to be a company firing on all cylinders and making strategic moves at a fast pace."

In July of 1998, Doug Kohrs, AMS's CEO, was running spinal cage pioneer Spine-Tech, which just a year earlier had been purchased by Sulzer Medica (now called Centerpulse AG and owned by Zimmer Holdings Inc. ), in one of the largest device deals of its kind [See Deal]. One of the founders of Spine-Tech, where he served as director of R&D, Kohrs had a long background in orthopedics, having worked first at Zimmer; then at a small development project within Johnson & Johnson that would eventually become Johnson & Johnson Professional Inc. ; and later at Minneapolis-based OrthoMet, now part of Wright Medical Inc. (In fact, it was at OrthoMet that Kohrs was introduced to the original cage technology. OrthoMet had, through a surgeon, Stephen Kuslich, MD, a license to the technology; when certain performance milestones weren't met early on, the rights reverted back to the doctor, who subsequently set up Spine-Tech as a separate company.)

Kohrs was actually AMS's second CEO after the acquisition. The first, who was CEO at the time the deal closed, was an executive who had extensive experience in urology and installed as CEO the day the deal closed. But, says Weatherman, AMS's new owners felt the fit wasn't right and re-started the search process. Despite his lack of urology experience, Kohrs immediately impressed Weatherman. "We were introduced to Doug by the folks at Piper Jaffray who told us, ‘You've got to meet him,'" she recalls. "And when I did, my instincts told me he would be perfect."

For Kohrs, the decision to take over AMS wasn't easy. "I was actually very happy at Spine-Tech and wasn't at all looking to leave," he recalls. "But this was an opportunity outside of a space I knew well and that was exciting to me." The fact that AMS was a private company, much like Spine-Tech had been in the 1990s, was also a draw. But the real incentive, says Kohrs was simply that "I saw a ton of opportunity there. Once I looked into it, I saw that Pfizer had run the company as a cash cow. What piqued my interest was a question: What if you didn't run it as a cash cow but as a product development engine and tried to leverage the strong relationships the company had built in the field through its sales force?"

A biomedical engineer by training, Kohr's passion for product development meshed perfectly with Warburg's investment philosophy: take a strong customer franchise and keep feeding products through it. Indeed, the problem with AMS was that while it certainly had a strong franchise with urologists and the demographics were impressive, that equally compelling technology pipeline just wasn't there. Even Weatherman concedes that in the years before Warburg Pincus bought AMS, "we kept hearing that though surgeons loved the company, the new product pipeline wasn't particularly robust."

AMS clearly needed a strong flow of new products to go with its strong franchise with customers. But without the third component, the right management team, AMS was unlikely either to capitalize on its reputation among urologists or to reinvigorate its product pipeline. Warburg Pincus quickly settled on Kohrs to be its new CEO. "When Warburg Pincus looked at AMS, about the only thing they weren't impressed with was the dearth of new products," notes Kohrs. In 1998, the company had five products, all to treat men; what Warburg Pincus saw were a number of related markets, each gigantic and very underpenetrated. Kohrs saw the same thing, he says: "And the challenge became: could we add things to our bag, and thus broaden the base of the company and really make this a growth engine?"

The Unmentionables Company

One can make too much of the fact that AMS was the only one of Pfizer's four device businesses not to find a corporate acquirer. There were, after all, several large companies reportedly interested in AMS at the time. And Bess Weatherman believes that, to some degree, Warburg Pincus may simply have been the beneficiary of good timing. "I think each of those companies was focused on much larger strategic acquisitions at the time of the [AMS] auction," she says, which made it difficult for them to put together a bid, particularly on a small company whose sales and profits were heading down.

Still, the implicit snub also resonates. Unlike the obvious and better understood opportunities in cardiovascular and orthopedic devices, selling the value of urology/gynecology plays isn't always easy. Despite compelling demographics, urology companies simply don't stir the kind of excitement or drive the valuations that other device segments, even smaller ones, do. "We had made a lot of money in ENT [with Xomed] and ENT is nowhere near as sexy as saving lives with angioplasty," says Weatherman. "And urology is less sexy than ENT."

And then there's the squirm factor—the fact that anything having to do with male or female genitalia simply makes some people uncomfortable. The Vertical Group's Dick Emmitt notes that a lot of the companies that looked at AMS "couldn't get past the penile implant piece. They saw it had a great franchise [with customers] and knew how valuable a great franchise could be. But they couldn't really focus on what could be done with that." And even today, Bess Weatherman concedes that the thought that Warburg Pincus was the lead investor in the world's largest penile implant company still makes her colleagues smile. Combining erectile dysfunction with a play in incontinence, she calls AMS, "The Unmentionables Company." "It deals with all of the things that people like to keep in the closet," she says.

Such emotional issues aside, Dick Emmitt notes that in 1998 in particular, AMS was caught in a difficult spot: many device industry executives believed the launch of the wildly successful ED drug, Viagra (sildenafil), would have a longer-lasting and more deep-seated impact on the penile implant business (see sidebar: "Viagra Comes In and Implants Go Soft"). Moreover, he says, many of them had seen other recent device plays in urology—for the treatment of BPH, for example, or new approaches to prostate cancer—come to market with great fanfare, only to disappoint. "Urology was in a down cycle," he says. "And that made people undervalue AMS."

Despite all of its success as a publicly held company, even today, AMS sometimes feels the stigma, if that isn't too strong a word, of making technology used primarily below, not above the waist. Notes Doug Kohrs, "This is a huge market but people rarely talk about incontinence or erectile dysfunction in the same way that they talk about other markets with huge potential, such as diabetes treatment."

But AMS officials are counting on any discomfort with or de-valuing of the clinical space to go away, especially as a combination of new therapies and a patient population more willing to seek treatment has begun to emerge. Ironically, despite a short-term hit in the year following its launch, Viagra has actually helped AMS long-term, if only, as Kohrs puts it, in "demystifying erectile dysfunction."

The much-anticipated release of two new drugs, Levitra and Cialis, to challenge Viagra should even further demystify the field. "If you look at the marketing budgets that the three companies have put together to fight for what is essentially the same patient, they're huge," Kohrs goes on. "A year from now, the public consciousness is going to be full with details about erectile dysfunction, and that should benefit us, because the more advertising there is, the more men will be willing to step forward." Indeed, he argues, "It's good for us that Viagra is out there; it's even better that these other drugs are coming."

AMS itself is raising the volume in talking to men about erectile restoration. The company recently launched the Erectile Dysfunction Institute (EDI), built around a unique web-based service designed to help men who have questions about erectile dysfunction to circumvent the traditional referral pattern—i.e., a general practitioner who refers to a urologist, a referral pattern which too often stops at the prescription of a pill—by connecting them directly to a urologist. "Believe it or not," notes Kohrs, "despite all of the publicity surrounding erectile dysfunction, there are still a lot of internists and GPs who, if Viagra doesn't work, will tell their patients that they just have to live with the problem—even if the patient asks about implants." (See sidebar: "Slip-Stream Marketing: Defining a New Referral Pattern.")

In a Flux Zone

For AMS, public awareness about erectile dysfunction was provided in a major way by Pfizer in its early and continuing efforts to promote Viagra; in many ways, the company's real challenge in this important product line lies in patient education about the limitations of the drug. But even a huge boost in its erectile restoration business will, AMS officials hope, pale in comparison with the company's other initiative, launched soon after Kohrs' arrival in 1999: its shift toward female uro-genital products.

As noted, throughout the 15 years that Pfizer owned AMS, the company pursued male-focused therapies almost exclusively, and the company became strongly identified as an erectile restoration company. "Following on the success of the penile and male incontinence products, they also developed some products for BPH," notes Kohrs. "That gave them three products for men, but, to my knowledge they never really considered looking at the gynecology market." Kohrs himself recognized early that erectile restoration would soon no longer be able to deliver the kind of growth rates that AMS would need to show to justify Warburg Pincus's investment. AMS would have to find new markets, both technologically and demographically.

Indeed, by April of 1999, AMS was "in a flux zone," says Kohrs, as old employees left and new employees came in—part of any acquisition, particularly one that brings in a new CEO with a mandate to change. "We were trying to be more entrepreneurial," he recalls. "We were suddenly a stand-alone company and had to think differently." Within three months, the company decided to abandon its male-only approach and enter the world of female products.

Incontinence was a logical place to start. By some estimates, around 10% of the 200,000 or so men who undergo prostate cancer treatment each year become incontinent. But the market never developed as naturally as a simple statistic might suggest. Highly discomfiting and, at times, outright embarrassing, male incontinence is, in particular, a widely under-treated problem. Thus, of the 20,000 or so men who become incontinent following cancer treatment, less than one-third, around 6,000, undergo surgery to fix the problem. "For many men, if they can avoid addressing issues surrounding their prostate, they will," notes Kohrs. "That's why many men delay addressing their incontinence following prostate cancer surgery."

It's also why AMS officials realized they couldn't build their incontinence business targeting men exclusively. Incontinence has only recently begun to attract patients in large numbers—and, not surprisingly, most of these new patients are women, many of whom begin with pads and evolve to adult diapers. More importantly, as more patients seek treatment, the market is potentially enormous. "In two years, the number of adult diapers sold in this country will exceed the number of infant diapers sold," Kohrs points out. "And if you talk to the diaper companies, they say that once those lines cross, they won't cross again in our lifetime."

The reluctance on the part of most men to seek treatment aside, there are a number of reasons why female incontinence represents so much more promising a market than male incontinence. For one thing, the potential pool of patients is so much larger. Incontinence in men is, as noted, mostly restricted to a relatively small group of men who undergo prostate cancer treatment and isn't necessarily tied to a specific age; in women, incontinence usually develops later in life among those who have had children by vaginal delivery. Incontinence rarely develops immediately after childbirth, but in time, the muscles in the pelvic floor that were stretched during childbirth, begin to sag and move around. (Statistics show that women who don't have children have a much lower risk of becoming incontinent, and some researchers make a connection between the number of children a woman has borne and the timing of incontinence symptoms.)

"What you're really trying to do is reverse the effects of gravity," says Kohrs. "The only way to permanently fix the problem is to move the organs back where they were when the woman was 20 years old." (AMS's products treat primarily stress incontinence; urge incontinence, another form of the condition, is largely treated with drug therapy.) Interestingly, though the markets are obviously related and both entail surgical procedures, the technology required to treat male incontinence is very different from that required to treat female incontinence. In turn, the different causes and approaches suggest another reason why female incontinence is a more robust market: treating male incontinence means replacing a damaged muscle, while treating female incontinence requires a simple procedure, designed to shore up the existing support structure.

Pulling Them Out of the Woodwork

Every bit as important as the clinical or anatomical differences between male and female markets are the psychological or social ones. While the evolution of the erectile restoration market has been slowed by the reluctance of men to seek treatment, women represent a much more active and eager group of decision-makers when it comes to health care. Not only do women make most of the health care decisions on behalf of themselves and their families—even in erectile dysfunction, women are often key to getting their husbands or partners to seek treatment—they're also much more willing patients.

Thus, much of AMS's urology marketing dollars are spent, as Kohrs puts it, "trying to pull men out of the woodwork." Women, by contrast, are not only much more knowledgeable about their condition and its treatments, they also seek treatment more eagerly and provide their own kind of marketing push. "If we can take a woman who's been wrestling with incontinence for five or ten years and get her back to normal, the first thing she'll do is tell ten of her friends," notes Kohrs. Men who are successfully treated for ED, by contrast, rarely talk about it among their buddies and may even be reluctant to talk about it with their partners. "We can dramatically improve a man's life with one of our implants, and he won't tell anyone," he sighs.

By contrast, Kohrs goes on, word of mouth referral is "incredible" in female markets. "The first thing a woman asks when a friend talks to her about one of our surgeries is, ‘What doctor did this?'" he says. "And in a week she'll have called for an appointment." Such eagerness is one reason AMS doesn't yet have anything like the Erectile Dysfunction Institute for its female markets. "We just don't need it at this point in our product evolution," says Kohrs. "Women already stay up to date on all of the latest treatments." (Another, important reason is that unlike men, for whom a urologist is a specialist referral, for women, gynecologists are often primary care physicians, so the need to re-direct referral patterns isn't as great.)

By nature and training a product development person with a strong R&D orientation, Doug Kohrs might have simply assigned AMS's product development team the responsibility of coming up with new devices to treat female incontinence. But, as noted, AMS didn't have a particularly strong track record of developing new products; more importantly, Kohrs didn't want to wait the two to three years it would take for even an energized AMS development team to come up with something. One of AMS's first hires after having been bought by Warburg Pincus was Eva Snitkin, a former medical technology equity research analyst at Montgomery Securities with extensive understanding of and connections in the urology/gynecology and women's health markets. It was Snitkin's job to identify strategic acquisitions. Within a month of the decision to focus on women, AMS began talking to an Israeli-company with whom Snitkin had long ties, a firm called Influence Medical Technologies Ltd. that had developed an innovative bone anchoring system.

The Influence acquisition represented an important diversification play for a company that was essentially a three-product company. But just as important as the technology piece was Influence's direct US sales force of around 20 people, calling on gynecologists and already generating $9 million in sales per year. "To begin selling to women, I knew we'd need a separate sales force," says Kohrs. (AMS's sales force only called on urologists and ED specialists.) AMS had to resolve some intellectual property issues and litigation around a patent with Boston Scientific—Kohrs eventually acquired some additional IP that he could use as leverage in his negotiations with Boston—but by December of 1999, the deal was closed. [See Deal]

Within the year, AMS would also sign two licensing deals, one with UroSurge, for a bulking agent AMS no longer sells, and a second with InjecTx , for a product which has turned into Prostaject, a highly promising and strategically vital project for AMS's future in the area of BPH [See Deal], [See Deal]. But Kohrs says it was never his intention to build the company's product portfolio exclusively through in-licensing and acquisition. Rather, as AMS entered 2000 with strong sales forces calling on both urologists and gynecologists, Kohrs decided it was time to revamp the company's product development efforts. "We really just started over," he recalls. "Even though we had bought the Influence product, we decided that we didn't want to buy everything. Instead, the strategy became one of organic growth going forward."

And it's paid off. In quick succession, AMS launched a second female incontinence product, called SPARC, in mid-2001 to follow the Influence product, and added a third, Monarch, in January of 2003. A fourth product, called BioArc, was launched in September of 2003. Less than five years after its acquisition by Warburg Pincus, the number of products in AMS's portfolio had increased four-fold, from five to more than twenty. And, says Kohrs, there were six new products planned for 2003 alone, five of which have already been released.

From Market to Product Development

Just as importantly, this past January, AMS purchased CryoGen Inc. [See Deal], pushing the company's franchise in female products beyond incontinence into endometrial ablation—a move Kohrs compares to the 1999 deal for Influence in terms of its significance for AMS's overall strategy and prospects. The shift for AMS from a male-only strategy to one that would embrace female markets as well has had powerful reverberations for the company. For much of the 1990s, AMS's erectile restoration and male incontinence businesses had been strongly focused on market development. Erectile restoration, particularly with Viagra's help, was all about getting men who otherwise didn't want to seek treatment, to visit a urologist—AMS had long before developed the technology and was ready to sell it; what the company needed was to attract customers.

But the sudden focus on female products, particularly incontinence, was much more of a product development play. Here, too, differences between male and female markets are instructive. "From a regulatory standpoint, female incontinence is a 510(k) business," says Kohrs. "The key to success is to come up with the best product and keep innovating." By contrast, both male incontinence, with its cancer-driven therapies, and erectile dysfunction have traditionally had PMA pathways. As a result, the product life cycles are much longer. "It's not that we don't develop new products for men," he goes on. "But we don't do it as quickly or as often because we have to do PMA studies."

The shift toward more of a product-development focus entailed another shift for AMS, one more cultural than anything else: from an emphasis on internal R&D to one that increasingly embraced physician-influenced development efforts. "Under Pfizer, the approach was to spend significant dollars on a technology and then find a market for it," Kohrs explains. "We don't do that here. Medical product development is all about cultivating ideas, whether from gynecologists or urologists, sifting through those ideas, and jumping on the right ones."

Indeed, despite his background in R&D, Kohrs had been known even at Spine-Tech for his close contact with the company's customers. Recalling the early CEO search process, Bess Weatherman says, "The only criticism I heard in doing due diligence on Doug was that he spent too much time in the field with customers. And my response was, ‘That's exactly what I'm looking for.'" Today, she notes, Kohrs has spent a significant amount of time "getting to know AMS's customers, what the surgeons' needs are and where their practices are going."

To better keep track of ideas flowing in from physicians, AMS has historically kept what it calls a record of ideas for new products. Doug Kohrs notes in 1999, AMS received perhaps 20 such records each year; today, AMS gets more than 300 annually. "There are a lot of very creative people out there in urology and gynecology," he says. "And for us, it's a matter of picking the right ideas."

Such ideas come from thought leaders at institutions like the Mayo Clinic, Duke University Medical Center, Indiana University, and The Cleveland Clinic, or from solo practitioners in private practice. Wherever they come from, AMS, working with scientific advisory boards built around subspecialties—the company has one in ED and one each in male and female incontinence—decides which product ideas to tackle and which to let pass. Kohrs draws parallels between what AMS does and what orthopedics companies have historically done. "There are five to ten key opinion leaders in every subspecialty, and you want to make sure you're talking to them," he says. "That's what we did well at Spine-Tech and J&J Orthopedic. You put together a core group of people to bounce ideas off of. Sometimes someone on our advisory board will hear something and say, ‘Wow, that's a great idea, I wish I had thought of that.' And we know to pursue that. Other times, they're helpful in saying, ‘I saw something like that years ago and it never went anywhere.' "

Caught in the Middle

"What we're trying to do is to let physicians know that if they have a good idea, we're the company to call because we're the best organized to get that product to market quickly," Kohrs goes on. Combining product and market development, AMS hopes to see its business expand two ways: by tapping into new clinical opportunities and selling more products to existing markets. Thus, Kohrs notes that AMS's three product areas, BPH, erectile restoration, and male incontinence, address half of the $1 billion market for urological devices, but the company only sells around $140 million of products into those markets. "That's good penetration," he says. "But we still have a long way to go." (The other half of the overall market is served mostly by commodity products, in areas where AMS doesn't play and isn't likely to.)

But the potential of AMS's strategy really becomes striking when considering the female markets. Right now, AMS is only serving surgically repaired incontinence, currently a $120 million market that is one of the fastest growing among all devices, with more than 17 million potential patients. And AMS's female incontinence business has already shown impressive growth, 28% between 2000 and 2001, and 48% between 2001 and 2002.

As noted, new product development will take AMS into areas beyond incontinence, most notably those dealing with uterine problems, such as uterine fibroids, currently small but one that Kohrs says "is going to be huge," as well as markets in pelvic prolapse and sterilization. That's why AMS's acquisition of CryoGen was so important. And that conversion to a more female-oriented offering is already well underway. In 1999, the company's products were used in 24,000 procedures, all in men. By 2002, the number of women who had received AMS products had soared to 45,000; this year, AMS officials are hoping to reach 100,000 procedures in total, 70% on female patients.

AMS isn't, however, the only company to have picked up on the potential of the female market. Both Johnson & Johnson and Boston Scientific have spent the last several years building strong businesses in female incontinence, and the former, through its Gynecare Inc. unit, also has products for endometrial ablation. Even AMS's cross-town rival Medtronic has a small effort in urge incontinence, adapting its core pacing technology to the problem. (And in 2001, Medtronic purchased VidaMed, which brings it a device therapy for BPH for men [See Deal], and, as noted, both Medtronic and Boston Scientific were among the original suitors competing with Warburg Pincus and The Vertical Group for AMS in 1998.) "This is a very competitive, very technology-driven industry, and some of the larger companies are waking up to the possibilities," says Kohrs. Indeed, previously, AMS had competed with Gynecare only in incontinence; the deal for CryoGen, he says, "now brings us completely head to head with Gynecare."

At the same time, there are a host of smaller companies, including some start-ups that are beginning to make noise in the space, including Novacept Corp. in endometrial ablation, Conceptus Inc. in sterilization, and Novasys Medical Inc. in minimally invasive female incontinence, to name just three. (See, for example, "Conceptus' Re-Birth: Surviving in Women's Health," IN VIVO, September 2003, .) Indeed, the competitive profile of the female market couldn't be more different from AMS's male-oriented lines where, in erectile restoration, it shares the market but with one distant competitor, Mentor Corp. , and male incontinence, where it is virtually the only company. (Urology also has seen its share of start-ups over the years, most of whom have either been acquired or gone out of business.)

AMS's history as a dominant player in urology is a large part of its competitive edge—a long-time player, it has, in effect, grown along with the industry and is now solidly entrenched. In fact, Kohrs argues that AMS is really unique in urology and gynecology circles: a strong mid-cap—its market capitalization is over $700 million—dedicated to that clinical space. "If you look at it from a size perspective," he says, "we have all of these competitors that are divisions of much larger companies on one side and a lot of small, niche companies on the other. And then there's us, standing by ourselves, in the middle with this incredible focus on urology and gynecology and nothing else."

And for that reason, Kohrs insists, the increased attention from the big players doesn't cause him to lose sleep. "It doesn't worry me at all," he says. "This is a very large, under-served marketplace, with room for multiple competitors." If anything, he welcomes the advent of big companies "because it's good for the overall business--it pumps more dollars into research and product development." Indeed, the entry of larger players, particularly those strong in cardiovascular, is sometimes a challenge for smaller device firms in other technology areas, if only because companies like Boston Scientific and Guidant are heavy spenders on R&D—or active acquirers to buy new things. But Kohrs points to AMS's own spending on R&D—at 9%, around twice what many similar device companies would spend—and argues that AMS can keep pace with larger companies' innovation efforts. "The way we're going to win is to be the most nimble," he says, "being able to make decisions and develop products quickly and to commit dollars judiciously."

Resisting Consumer Appeal

As noted, one of AMS's long-standing strengths has been its reputation and strong brand recognition with urologists. "As the only company with a surgical treatment for male incontinence, our market growth is all about educating the patient and training the physician," says Kohrs. "Most physicians already know us because we've been at this a long time." Similarly, a large part of AMS's push beyond incontinence in its female product lines came from surgical gynecologists who were eager to see another company, besides Gynecare, willing to invest in new technology. "As the gynecology community has come to know us better as American Medical Systems Gynecology, a lot of surgical gynecologists are happy that there's now a second company coming to talk to them," he says. "We're seeing an excellent flow of new product ideas from physicians that will help us develop our follow-on products."

AMS has spent much of the last several years trying to build a similar reputation among gynecologists. The purchase of Influence, with its US-based sales force, was part of that. In addition, because 80% of female incontinence is also treated by urologists, AMS's strong track record in male-oriented products helped lay a groundwork for its female incontinence products.

But, particularly in markets like urology and gynecology, the question for a company like AMS is whether a strong franchise with clinical leaders is enough or whether such efforts have to be supplemented with an appeal to consumers. In female incontinence, for example, AMS is counting on growth coming not just from superior clinical results of their technology, but also the patient-friendly nature of the device, an important consideration given that most incontinence approaches are low-tech products such as diapers and pads that represent little trauma or pain for the patient.

Thus, in discussing the benefits of its approach, AMS is likely to talk about things that appeal to consumers as much, if not more than, to physicians. AMS's devices are clearly more high tech than pads or diapers, says Kohrs, but with little of the trauma or complexity normally associated with high-tech approaches. "What we do is very minimally invasive, particularly in our female markets," he says. "These procedures take 30 minutes on average, 45 at most, and they're all done on an outpatient basis." They're also all fully reimbursed and routinely achieve success rates of 90%.

Certainly, the company's experience with Viagra was—and continues to be—a lesson about the importance of educating and/or talking directly to potential patients. That's a big part of what the Erectile Dysfunction Institute is all about. "We spend a lot of time trying to educate men because we believe they're often not getting to the right physician when Viagra doesn't work."

But Kohrs resists the idea that, particularly because of their impact on so-called quality of life issues, AMS's products should be marketed to consumers. Thus, the marketing message of AMS's female line, despite its consumer appeal, is currently targeted almost exclusively to physicians. "We let them know how well the product works and let them sell the patients on our products rather than doing it ourselves," he says. Even the phrase "quality-of-life" device, makes Kohrs uncomfortable because, he argues, from a business perspective, it can detract from the value of AMS. "Investors get a lot more excited about something that saves lives, like some pacemakers or drug-eluting stents," he says. "It's often hard for them to get their arms around quality of life products," even though the impact of an AMS device on turning a person's life around can be dramatic.

As new and established low-tech therapies to treat incontinence and erectile dysfunction catch on, however, the challenge for AMS--a challenge many device companies face—lies in converting some portion of the patient base to the more technologically sophisticated products AMS is developing. The gulf between taking a pill—such as Viagra or one of the other new ED drugs coming to market—and having a penile prosthesis implanted is huge and offers an intuitively clear example of why it's virtually impossible to find someone who wouldn't prefer to start with a pill and migrate later to one of AMS's therapies.

As noted, in its erectile restoration marketing strategy, AMS has, for the most part, resisted targeting those patients who suffer milder or lower acuity forms of ED, trying, instead, to identify men who haven't been helped by drugs. But its female incontinence strategy, though targeted at physicians, does implicitly reach out to a broader audience. Arguing for the high success rates and patient-friendly nature of surgery, Kohrs notes that patients might almost see surgery as a first, rather than last choice. "There's very little that can go wrong in these procedures, and even if you don't get complete continence, then at least you'll go from ten diapers a day to one pad a day," he says. "It seems to me that if you're a patient and have a choice, there's no reason not to begin with minimally invasive surgery."

And, in its most direct appeal to a broader market, AMS's BPH therapy Prostaject will specifically challenge current drug therapy. "There are two million men in this country taking drugs for BPH," notes Kohrs. Such regimens are not only expensive, they cease to be effective once the patient stops taking the drug. That's why device companies like AMS and Medtronic, with its VidaMed acquisition, have begun to look at device therapies that seek to replace drug regimens with a one-time cure. That's also why AMS's clinical trials for Prostaject will compare the device not to other devices, but to drug therapy. "This is probably a $4 billion a year market for drug companies," he goes on. "We don't want to compare our product to device therapies because if you take all of the BPH device companies and add up their procedures, you get maybe 100,000 procedures a year. I'd much rather fight directly for part of the 2 million patients who are on drug therapy."

A Successful IPO and Then Some

Given the longer lead times in development and regulatory pathways, AMS doesn't expect Prostaject to reach the market until late in 2006. It's the one part of AMS's strategy that hasn't clicked, Doug Kohrs's one disappointment in the execution of his strategy. "When we bought it, we thought it would be considered a device and would follow a device regulatory path," he says. "When the FDA kicked us over to the drug path, we knew we had signed up for another three years."

But if Prostaject has been a mis-step, it's been one of the few for AMS over the past four years. Indeed, the company's shift from male-only products to an embrace of the female market as well couldn't have been better timed. AMS's sales for the first year after its purchase by Warburg Pincus were $81.3 million; this year, sales for the first six months alone reached $81.6 million.

AMS has been fortunate in its timing in other ways as well. While other private medical device firms have patiently waited for the public equity markets to open again, AMS has been one of only a handful of companies to have done a successful IPO in the last three years and kept its stock price high. Bess Weatherman notes that after the spectacular failures of the Class of ‘96—device companies which went public around that time only to see many of them crash, turning public investors away from device stocks—a window opened up in early 2000, leading many to believe there was a market for device IPOs again. "It was a fabulous year," she recalls. "Companies like Aspect and Oratec went out early and were just super hot." Moreover, despite a growth rate of only around 8% in its core urology products, AMS officials felt confident that they could position the company as a growth story based on the explosive potential of its female product lines.

Indeed, during the road show, AMS told investors it could reach 12% growth in 2001 and 14% in 2002—a story many apparently found credible. AMS went public in July of that year, raising $64 million at $11 a share. [See Deal] A year later, the company did a follow-on offering, this time raising $54 million at $16.40 a share, largely to pay off debt incurred during the original Pfizer transaction. [See Deal] And while the stocks of both Aspect Medical Systems Inc. and Oratec Interventions Inc. [See Deal] crashed soon after their IPOs, all but closing the IPO market for devices for the next several years, AMS's stock performance has remained strong, for the most part. Notes Weatherman, "The stock looked good because the company was putting up good results every quarter and was gradually getting the growth rate up."

A Behind-the-Scenes Makeover

For Kohrs, the key to the successful IPO and to the sustained interest of investors has been the company's strong cash flow. "What we've learned is that if the company is positioned economically to generate good cash flow on a quarterly basis--cash flow after capital expenditures so that you're building up your cash reserve in a way that enables you to do other deals or re-invest in R&D--investors will appreciate it," he says. "Most of our investors recognize that no matter what may happen to make the top line fluctuate, we're running very efficiently, so we can always, from an operating margins standpoint, generate a very good return."

That's not to say that AMS hasn't had peaks and valleys in its stock performance, particularly in the recent bear market. But, says Kohrs, most of the dips have been due to broader, external forces—everything from concerns about Medicare reimbursement or FDA regulatory approval to worries about the emergence of J&J as a competitor—rather than with poor performance by AMS. "We've been able to show very consistent results and have been very careful to make sure that when we promise to do something—whether a product launch or a strategic re-alignment--we do it," he says.

That's why managing the incorporation of female products into AMS's core male-oriented lines is so important and why the company isn't likely to do a complete shift to female products any time soon. AMS's female products are clearly the fastest growing products; this year, its erectile restoration business has only grown 2% while, as noted, the company's product mix, measured in terms of procedures, has gone from 0% to 70% in female procedures in just three years. But AMS's male product lines make up a disproportionate share of top- and bottom-line revenues; well more than 50% and 60% respectively, particularly because the implants, which sell for several thousands of dollars each, are priced much higher than the female products. And that's before AMS realizes the potential of Prostaject.

Today, as it stands poised to exploit the potential of the female product market, AMS is financially stronger than ever. At the end of 2002, the company achieved a 25% operating margin, based on 20% top line growth, and expects to continue to post 20% per year in organic growth, while increasing the bottom line. "Our goal is to reach a pre-tax operating margin of 30% within the next 24 months," says Kohrs. "That's important because it puts us in the rare air of medical device stalwarts like Guidant, Medtronic, and Biomet. We want to be in that group."

It's not often that companies already highly successful in their core markets voluntarily re-invent themselves. For AMS, the shift in focus from all male products to an embrace of female markets, while an important part of its re-invention, is hardly a radical one, given how logically and naturally urology and gynecology fit together. Rather, the company's most significant make-over was behind the scenes, philosophically and culturally. Not only did the evolution from urology to gynecology present very new challenges to AMS, perhaps most tellingly in the shift from a market development model to one focused on product development, but AMS had to become a very different kind of company to make that evolution—from a quiet, albeit successful, division of a large pharmaceutical company, dominant in its small market niche, to an energized growth engine, driven by both a strong product development effort and the willingness to make strategic decisions quickly. That's why today, Doug Kohrs believes that AMS's strongest asset may be its entrepreneurial spirit. "We went from being an old, established company living within a drug company, to a fast-growing entrepreneurial company with no Big Brother," he says. "We stress that every day: we're on our own, making decisions as if we were spending our own money."

Viagra Comes In and Implants Go Soft

Even before American Medical Systems Holdings Inc. came up for sale, the need to develop both new products and new markets was clear to AMS's future owners, Warburg Pincus and The Vertical Group. But if they needed any further convincing, the importance of product expansion was reinforced around the time of the sale by Pfizer Inc.'s soon-to-be blockbuster success with a rival erectile dysfunction therapy, Viagra.

Doug Kohrs argues that AMS's penile implant and Pfizer's ED drug don't compete and are, in fact, complementary. "We don't want anything to do with the patient for whom the pill works," he says. "The last thing I want is for that patient to get one of our implants—because he just doesn't need it."

By the same token, he goes on, "We now know that Viagra doesn't work in everyone." Indeed, AMS targets what Kohrs calls "Viagra failures;" in that sense, he calls the drug both a great diagnostic for severe ED cases and an awareness builder for therapies like penile implants that treat higher acuity cases. "Every single man who gets an implant has taken Viagra first." For those for whom it doesn't work, says Kohrs, "What we need to do is to get to those people and say, ‘Don't give up. Obviously you're motivated enough to get treatment. Let's move you to the next level.' "

For about a five-month period in 1998, from April to September, Pfizer sold both Viagra and AMS's penile implants. And even before the divestiture from Pfizer, AMS officials saw the complementary nature of the two products. Internal records at AMS suggest that there were several discussions in late 1997 and early 1998 about having AMS sales reps carry and promote Viagra to the urologist's office. But Pfizer turned them down.

There were probably several reasons why Pfizer wasn't keen on combining the AMS and Viagra selling efforts. For one thing, speculate executives close to the company, Pfizer had decided much earlier to spin-off its device businesses; notwithstanding the five-month overlap, they knew the amount of time they owned both products would be short-lived.

More importantly, in an effort to boost sales, Pfizer's early marketing efforts focused strongly on Viagra, not just as a potential solution to ED, but as the solution for the problem. "When Viagra was launched, it was touted as the be-all, end-all cure," notes Kohrs. "It was going to work on everyone. In fact, Pfizer doesn't market it that way anymore because there's enough data to show that it won't work in certain types of patients."

Thus, for example, men whose prostates have been damaged typically won't benefit from Viagra because the nerves that control erections also have been removed; similarly, patients with early onset of vascular disease resulting in clogged arteries, AMS's major patient group, won't see benefit for long from Viagra because eventually the vessels become simply too clogged. Finally, Type II diabetics more often than not don't respond to pharmaceutical solutions to ED.

No one's saying that Pfizer deliberately under-funded AMS during the critical period around Viagra's launch, but, notes Kohrs, the company "missed a huge opportunity to leverage each therapy off the other." Ironically, Viagra cost Pfizer an AMS-related opportunity in another sense: Viagra's aggressive claims for effectiveness hammered the penile implant business in the six months following its launch, driving down sales 25%. "A lot of patients who were queued up to get an implant saw this wonder drug being advertised and said to themselves, ‘I'll just take the wonder drug,'" says Kohrs. Bess Weatherman points out that the day Warburg Pincus signed the deal with Pfizer, AMS recorded its worst sales month in five years. "What Viagra did was cause a pause in the market," she says.

Weatherman notes that if others were scared away from bidding on AMS because of Viagra's immediate hit, the company's eventual owners never flinched. "Maybe it's because we were so focused on clinical issues, it never occurred to us to drop out." And, indeed, AMS's penile implant sales have, by now, re-bounded to levels above those in pre-Viagra days. But given the close timing of Viagra's launch and AMS's auction, Pfizer couldn't have sold the company at a worse time. "Pfizer was its own worst enemy," says Doug Kohrs. "Because they kept insisting that Viagra worked for everyone, they stunted the growth of the implant business. Had Viagra's launch been just a year later, Pfizer would have gotten a lot more for AMS."

Slip-Stream Marketing: Defining A New Referral Pattern

Like many device companies, American Medical Systems Holdings Inc. faces a challenge in promoting its therapy: while clinical specialists tend to see higher acuity patients and thus are more procedure-oriented and device-focused in their approach to treatment, primary care physicians tend to see patients earlier and at lower acuity levels. Their strongest impulse is to prescribe drugs. The problem is particularly acute in areas like incontinence, where the condition is inconvenient, but not life-threatening, and erectile dysfunction, where there is often a reluctance or embarrassment associated with seeking treatment. Thus, the challenge: how to get patients beyond their primary care doctor and into the specialist.

To help, AMS has developed a novel web-based program, called the Erectile Dysfunction Institute (EDI), that enables patients suffering from erectile dysfunction to skip the traditional referral pattern through the GP and make an appointment directly with a urologist. (The web site can be found at cure-ED.com.)

AMS developed the program, based on a concept called "slip stream marketing," with an independent Minneapolis company. The site does more, of course, than simply make appointments. It tells men who have questions about erectile dysfunction a lot about the disease and about the range of therapies, including drugs and drug-device-like therapies such as that promoted by Vivus Inc. "The web site covers every conceivable treatment you could have," says Kohrs.

Kohrs notes that most device companies confine their direct-to-consumer marketing to 1-800 numbers. "The problem is, when you call the number, you get a packet of information, but that's where it stops," he says. "We've taken it a step further. When you call the 800-number, you reach a nurse trained in ED who can really talk to you about what's going on."

Device companies often must dance around direct-to-consumer tactics because of the fear of alienating physicians. Thus, in promoting its minimally invasive orthopedic procedures, Zimmer specifically developed the program so that it wouldn't send a large number of patients descending on orthopedic surgeons, demanding a procedure the surgeon doesn't want to perform. (See "Orthopedics through a Keyhole," IN VIVO, January 2003, (Also see "Orthopedics Through a Keyhole" - In Vivo, 1 Jan, 2003.).)

But Kohrs says AMS runs a much smaller risk: the GPs and family practitioners the web site is designed to supplement aren't dependent on Viagra patients, so if the web site directs some to urologists, they won't feel threatened. At the same time, "urologists are all for this because they want to get to this patient, too. We're funneling them patients they don't currently have."

AMS has signed up a network of over 100 urologists around the country who have agreed to be referral conduits, not general urologists, but specialists in ED who are expert at penile implant surgery. "What happens is that the nurse will talk to the person about surgery and then ask where they live," notes Kohrs. She then identifies a urologist nearby and asks if the person would like to make an appointment. "And the doctors that participate have blocked off parts of their schedule for these patients," he explains. "Any patient who calls that number is guaranteed to see a doctor within seven days."

The nurse will also help the patient find a doctor covered under his insurance program; that's the primary reason why the program doesn't offer urologists geographic exclusivity. "What we're trying to do is to cut out all the hassle for the patient and the physician and get the person the treatment he needs from an expert," says Kohrs.

To date, AMS says the program has been successful; data from the first six months shows that more than 150,000 people have visited the web site and close to 500 have made appointments. Kohrs notes that 85% of all Viagra prescriptions are written by GPs, internists, and family practitioners; only 15% by urologists who are trained to talk about follow-up therapies if and when Viagra doesn't work. Internists and GPs don't "have any vested interest in therapies beyond Viagra because there's really nothing they can do for the patient," he says. "What we're trying to do with this web site is get them directly to an ED specialist."