Cobe Laboratories, Inc. Business Information, Profile, and History

History of Cobe Laboratories, Inc.

COBE Laboratories, Inc. is a leading developer of medical devices and systems for handling blood outside the body, focusing on three major areas: renal care, cardiovascular products, and blood component technology. Its renal care business is a market leader in the manufacture of dialyzers, dialysis machines, and other equipment needed by patients with chronic kidney failure. COBE's cardiovascular units sustain the functions of the heart and lungs while a patient undergoes heart surgery. The company has also pioneered blood component technology products used to divide blood into its separate components for the treatment of various illnesses. During its first 25 years, COBE succeeded in creating marketing channels in more than 50 countries. Since being acquired by the Swedish medical technology company Gambro AB in 1990, COBE has been able to take advantage of its parent's larger non-U.S. presence to solidify its worldwide marketing efforts and has had additional capital for acquisitions and alliances that have strengthened and expanded its activities in health care services.

COBE was founded in 1964 by Robert Collins and Randall Bellows, both of whom had worked at a major hospital supplier near San Francisco called Pharmaseal. COBE's name was derived from the first two letters of the founders' last names. Working out of a garage in Los Angeles, the two men made custom heart-lung tubing packs used to connect patients to heart-lung machines. In 1965, COBE merged with Medical Marketing, a Seattle firm owned by Collins's and Bellows's friend Ted Dale, who had persuaded the Seattle Artificial Kidney Center to use COBE's custom tubing packs. The merger increased the young company's ability to market its products and initiated its venture into the dialysis industry, which would eventually become the core of its business.

Dialysis products introduced in the company's first five years included hemodialysis blood tubing sets and the Kiil dialyzer (a dialyzer is an artificial kidney--essentially a specialized filter--used in dialysis to cleanse the patient's blood). In 1967 Collins and Bellows relocated the company to Lakewood, Colorado, a suburb of Denver, in part because they felt they needed a more centralized location for distribution purposes.

During the early 1970s, COBE expanded its presence in the dialysis market. COBE replaced the Kiil dialyzer (weighing 75 pounds) with a less bulky one called the Mini-D. It also developed the Centry dialysis monitoring system, at 78 pounds also more portable than earlier models. Together, these introductions began to make home dialysis more practical--a boon for the patient in terms of improved chances of rehabilitation, the elimination of thrice-weekly trips to the hospital, and much lower costs. The Centry system also had some advantages over existing systems: it was compatible with elements of dialysis machinery manufactured by other firms and used tap water in its mixture of cleansing solution. Added to the COBE line in 1971 was an Automated Peritoneal Dialysis unit for patients not able to tolerate hemodialysis, a system designed to complement the Centry system.

Such product introductions, particularly those involving COBE's dialysis products, were bolstered in 1972 when Medicare was expanded to cover end-stage renal disease. As a result, many more people could be supported with dialysis treatments and the market for dialysis equipment grew. That same year, COBE became a public company.

Very early in its history, COBE executives recognized the international market as a key to the company's growth. In 1967, the company's first international distributor, AMCO, Inc., was appointed in Japan. The company established its first international subsidiary in Brussels, Belgium, in 1973, followed by additional subsidiaries in West Germany, Canada, France, and the United Kingdom over the next four years.

Domestic sales efforts were facilitated through the establishment of three regional distribution centers covering the West (Fremont, California), Midwest (Chicago), and East (Glen Burnie, Maryland). COBE's new product development and marketing efforts resulted in sales of $16.8 million by its tenth anniversary in 1974 and its first $10 million sales quarter in 1977.

In 1975, with the introduction of its next dialysis machine--the Centry 2--COBE could offer a complete dialysis system, the first in the industry, and one designed for portability and ideal for home use. The system was also attractive to hospitals and dialysis centers because the dialysis process was faster than in older models, cutting costs by allowing staff to handle more patients in the same amount of time. The Centry 2 controlled the complete dialysis process, which involved transporting blood through tubing to an artificial kidney (dialyzer) which cleansed the blood and removed excess fluid. A monitor kept track of the complete process. COBE manufactured all components of the system, including dialyzers, blood tubing, chemicals, and other supplies necessary to the hemodialysis process. This first application of a system approach to renal care helped COBE become a market leader in the United States over the next several years. By 1978, renal care accounted for 76 percent of the company's revenues, and COBE posted a one-year increase of 49 percent in renal care sales from $32.1 million in 1977 to $47.7 million in 1978.

COBE also secured a place in the cardiovascular field with the acquisition of Galen Laboratories in 1973. The key product acquired thereby was the Optiflo Oxygenator. During heart surgery when blood flow to the heart and lungs was halted, the function of the lungs was replaced by the oxygenator, which supplied the patient's blood with oxygen as the lung normally would, while the blood-pumping function of the heart was replaced by an artificial pump. Having thus entered the oxygenator market, COBE introduced the second-generation Optiflo II Oxygenator in 1978. With the development of the COBE Stockert Perfusion Pump, the company could offer a complete life support system for the increasingly common open heart surgery procedures of the time. Further innovation occurred in 1982 with the development of the COBE Membrane Lung (CML) Oxygenator. This membrane oxygenator significantly advanced the safety of cardiovascular surgery; virtually made obsolete the commonly-used bubble oxygenator; and propelled COBE to a market leadership position in the cardiovascular field, eventually to a 20 percent worldwide market share by the end of the 1980s.

After more than a dozen years of healthy growth (net sales more than doubled in a four-year span alone from $45.6 million in 1977 to $92.6 million in 1980), COBE experienced some difficult years in the early 1980s. Net sales growth in 1981 slowed to less than five percent over 1980, while in 1982 it only improved to 8.5 percent. And although the sales increases were higher during the next three years (due in part to several acquisitions), profits fell from $6 million in 1982 to $5.6 million in 1983 and to $3.2 million in 1984, again due in part to acquisitions, notably that of IBM Biomedical Systems, but also attributable to the failure of a new product, a hollow fiber dialyzer.

Moreover, separate sales figures for the Medical Systems Division (primarily the renal care products) indicated that during the first five years of the 1980s that concern had grown only 11 percent, while the Cardiovascular Division grew by an impressive 126 percent. Indeed, the dialysis market had stagnated because of increased competition initiated by cost-containment efforts by doctors and hospitals affected by changes in government-sponsored health coverage. The company sought to offset these troubles by renewing its emphasis on new product development, aggressively pursuing strategic acquisitions, and broadening its product line with the expansion into a third major product area: blood component technology.

During this time, COBE's Centry dialysis systems held about 40 percent of the U.S. market in single-patient machines. In 1981, the company introduced two new renal care products to the Centry line. The Centry 2 Rx system was designed to provide patients with prescription hemodialysis by allowing a doctor to vary the amount of sodium and sodium bicarbonate delivered to the patient during dialysis depending on individual needs. The Centry 2000 was a more sophisticated microprocessor giving a doctor greater control over the dialysis process and featuring additional safety features. The company's commitment in the 1980s to new product development was particularly evident in its introduction of the Centrysystem 3 in 1986, its first new dialysis system in 11 years. In designing its third-generation system, COBE kept firmly in mind the increasing cost-consciousness of physicians and hospitals. The major advantage of the Centrysystem 3 was its ability to safely cut the treatment time for a dialysis session in half, thus allowing hospitals and dialysis centers to handle twice as many patients in the same amount of time. The company promised further cost savings from the system's ease of use and lower maintenance costs due to its increased reliability. Complementing this new product development activity was the acquisition also in 1989 of Secon GmbH, a German medical technology company that manufactured a compact hollow fiber dialyzer that worked perfectly with the Centrysystem 3 and could be readily marketed with it.

With the goal of decreasing the company's reliance on its renal care products, COBE expanded into its third major area of research and development in the early 1980s by introducing the Therapeutic Plasma Exchange System, or Centry TPE System. Blood component technology had become increasingly important during this period for the treatment of cancer and immune system diseases. Treatments for these ailments involved transfusions of individual blood components, such as platelets, stem cells, bone marrow, and plasma. In some treatments certain components were extracted from the patient's blood, treated, and then reinfused. After Centry TPE was introduced in 1981, COBE delved further into this area with its 1984 acquisition of IBM's Biomedical Systems division. The acquisition brought products that became known as the COBE 2991 Cell Processor and the COBE 2997 Blood Cell Separator, both used for blood component therapy. It also led to the development and 1988 introduction of the COBE Spectra Apheresis System used to collect from donors very pure blood components (such as platelets) primarily for cancer therapy treatments. That same year a related acquisition of Kardiothor brought the BRAT Intraoperative Blood Salvage System to the COBE cardiovascular line. The BRAT system was used during surgery to clean and recycle the patient's blood for reinfusion, reducing the need for transfusions from donors. All of these blood banking technologies became increasingly important as the purity of the world's blood supply came into question with the discovery of the HIV virus and AIDs.

By 1989 COBE had grown to net sales of $237.9 million with a profit of $9.8 million, up from sales of $92.6 million in 1980. Besides its overall growth and profitability, the company successfully diversified its product line and eliminated its over-reliance on the inconsistent dialysis market. At the end of the decade, sales were almost evenly divided between the Medical Systems Division (51.6 percent) and the Cardiovascular Division (48.4 percent). Significant too was the company's impressive increase in sales outside the United States. Since establishing an International Division in 1985 for marketing its products overseas, COBE increased its foreign sales from $39.5 million to $82.1 million, a 108 percent increase. Further, the International Division accounted in 1989 for 45 percent of the company's sales, compared to only 26 percent in 1985. Particularly given COBE's increasing success outside the United States, many observers were surprised to learn in 1990 that COBE was to be acquired by Sweden-based Gambro AB. Having fended off several hostile takeover bids over the course of the 1980s, however, COBE officials agreed to sell the company to Gambro AB.

The terms of the sale were an offer to buy all outstanding shares of COBE stock for $37 per share, or a total of approximately $253 million. The deal was announced in March and consummated in June after a detailed antitrust examination by the U.S. Federal Trade Commission. At the time of the acquisition, Gambro was based in Lund, Sweden, was partly owned by the Swedish automobile manufacturer Volvo, and had sales of about $500 million (or twice that of COBE). The two companies were both leaders in the renal care field, and in the year of the acquisition renal care sales accounted for 74 percent of Gambro's sales. Although they were competitors, their dialysis products and marketing efforts were considered complementary. For instance, while COBE's dialysis machines were considered market leaders, the company lacked certain components of dialysis systems that Gambro excelled in, particularly dialysis membranes. In terms of marketing, Gambro could take advantage of COBE's dominant presence in the U.S. market, while COBE products could now be more easily sold worldwide. The acquisition also significantly diversified Gambro, which had been limited to the renal care and intensive care/anesthesia fields. It now gained a significant foothold in the cardiovascular and blood component technology fields. The primary reason given by COBE's co-founders for the sale was to "assist COBE in expanding the marketing of its products in countries outside the U.S."

Following the acquisition, COBE's operations were divided into several subsidiaries under COBE Laboratories, Inc. The dialysis products were organized as COBE Renal Care, Inc.; the cardiovascular products as COBE Cardiovascular, Inc.; the international marketing division as COBE International Division; and the blood component technology products as COBE BCT, Inc. (separated for the first time). Robert Collins and Randall Bellows, the company founders, both retired following the sale, but continued to be involved in the operations as members of COBE's board of directors. Observers estimated that Collins's share of the sale amounted to $30 million, while Bellows reaped $10.1 million. Gambro then brought in Mats Wahlström to become the new president of COBE.

The benefits to COBE from the merger became readily apparent over the next two years as the company began to get involved in major acquisitions it would have been unable to afford on its own. The largest involved a series of 1991 and 1992 investments (the final one totaling $53.6 million) in REN Corp. USA, Inc., giving COBE a majority interest in the company and control of its board. Based in Nashville, Tennessee, REN owned the fourth largest chain of dialysis clinics in the United States, with 51 clinics, about 4,000 patients, and potential for growth based on the increasing privatization of health-care services. The acquisition of REN not only moved the company into the field of health-care services for the first time but also changed its renal care activities into a more vertically integrated operation. In 1994 the COBE Renal Care subsidiary acquired the Florida-based Dial Medical for an undisclosed sum. This deal further broadened COBE's renal care assets by giving it a much stronger presence in the market for dialysis concentrates, which Dial Medical produced and distributed.

Meanwhile, COBE BCT was busy making alliances with other medical firms. In September 1993 an agreement was reached between the subsidiary and Cryopharm Corporation of Pasadena, California. Under the terms, COBE invested $4.6 million over two years for the development and marketing of a cryogenic preservation technology patented by Cryopharm. While blood components stored at room temperature were only viable for five days, using the new freezing method meant that platelets, red blood cells, bone marrow, and blood stem cells could be successfully stored in freezers for several months. The agreement called for the companies to co-develop the technology and for COBE to market it, having obtained worldwide rights. Two months later a second alliance was announced between COBE BCT and Aastrom Biosciences, Inc., based in Ann Arbor, Michigan. COBE invested $20 million in Aastrom's Stem Cell Expansion System, which used a bioreactor to multiply stem cells 75-100 times. The technology would allow many more patients to receive cancer treatment at reduced costs. COBE gained worldwide rights to the bioreactor technology for such treatments using stem cells.

In a little more than 30 years, COBE Laboratories had grown from a $40,000 one-product business to a diversified, multinational corporation with annual revenues of more than half a billion dollars. As it approached the end of the century, it had the security of being owned by a global leader in health technology and could afford to solidify its position through major acquisitions and alliances. COBE's activities in the early 1990s suggested that it would continue to pursue innovations in its areas of expertise and to further diversify its operations.

Principal Subsidiaries: COBE BCT, Inc.; COBE Cardiovascular, Inc.; COBE International Division; COBE Renal Care, Inc.; REN Corporation (53.5%).