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

Company Perspectives:

To exceed the expectations of our worldwide customers by fostering a work environment where highly-motivated, action-oriented employees work together to continuously create and deliver high-quality, innovative products and services.

History of Cobe Cardiovascular, Inc.

COBE Cardiovascular, Inc. is a leading producer and distributor of medical devices and systems used in cardiac surgery. COBE's cardiopulmonary products, which include oxygenators, heart-lung tubing packs, autotransfusion systems, and heart-lung machines, help sustain the functions of the heart and lungs while a patient undergoes open-heart surgery. COBE Cardiovascular evolved out of COBE Laboratories, Inc., a firm founded in 1964 focusing initially on custom heart-lung tubing packs. COBE Laboratories gradually developed a broader product line centering on medical devices and systems for handling blood outside the body, with three major areas of focus: renal care, cardiovascular products, and blood component technology. The Swedish medical technology company Gambro AB acquired COBE Laboratories in 1990, at which time COBE's cardiovascular division was transformed into COBE Cardiovascular, Inc. Early in 1999 Gambro sold COBE Cardiovascular to Sorin Biomedica S.p.A., an Italian medical technology firm affiliated with SNIA S.p.A., which at the time was a conglomerate with interests in medical technology, chemicals, and real estate. Early in 2004 SNIA spun off its medical technology business into a separate, publicly traded firm called Sorin S.p.A.

Early History of COBE Labs

COBE Laboratories 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.

Securing Market Leadership Position in Cardiovascular Field

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 Stöckert 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 5 percent over 1980, while in 1982 it only improved to 8.5 percent. 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, with additional safety features, giving a doctor greater control over the dialysis process. 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 because of 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 overreliance 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.

The 1990s: COBE's Gambro Decade

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 cofounders 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 Corporation-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 healthcare services. The acquisition of REN not only moved the company into the field of healthcare 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 viable for only 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 to 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.

COBE Cardiovascular, meantime, rolled out a series of new products and new versions of older products under the new ownership scheme. These included the CMS oxygenator family (1990), the CML Duo Flat Sheet oxygenator (1994), the Optima Hollow Fiber oxygenator and the BRAT 2 Autotransfusion System (both 1995), and the COBE Century heart-lung system (1997). In 1998 COBE Cardiovascular introduced cardiopulmonary bypass circuits that featured the SMARxT biocompatible surface. This innovation reduced the chance of platelets adhering to the bypass circuit, an occurrence that can compromise the blood returning to the patient's body, potentially leading to postoperative complications.

Late in 1995 COBE Laboratories acquired full control of REN Corporation, which was integrated into COBE Renal Care early the following year. COBE Renal was renamed Gambro Healthcare, while REN took on the new name Gambro Healthcare Patient Services. A Gambro restructuring in mid-1998 essentially eliminated COBE Laboratories as a subsidiary and transformed the subsidiaries of COBE Laboratories into three Colorado-based units: Gambro Healthcare, responsible for operating dialysis clinics and marketing and sales of dialysis products (with worldwide development and production of dialysis products taken over by an Italian unit called Gambro Renal Products); COBE BCT, covering blood component technology products; and COBE CV, producer of cardiovascular surgery products. This set the stage for COBE CV's exit from the Gambro group, which aimed to increase its focus on its renal care activities.

Beginning of Sorin Era for COBE Cardiovascular: 1999

In November 1998 Sorin Biomedica S.p.A., the largest medical technology company in Italy, reached an agreement to buy COBE CV from Gambro for $267 million. (The acquisition technically also included COBE Laboratories and other assets, but COBE CV was at the heart of the deal.) Sorin was affiliated with SNIA S.p.A., which at the time was a conglomerate with interests in medical technology, chemicals, and real estate. COBE CV was seen to be a perfect fit with Sorin, which already had a strong presence in the cardiac surgery sector through its ownership of Dideco S.p.A., an Italian producer of products for extracorporeal blood circulation and blood reinfusion; and the German firm Stöckert Instrumente GmbH, one of the world's leading producers of heart-lung machines. Other related products produced by Sorin companies included cardiovascular implantable devices, such as valves and stents (tiny devices placed into diseased arteries to prop them open), and cardiac rhythm management equipment, such as pacemakers and implantable defibrillators. Sorin also had a smaller presence in renal-care products, which, following the acquisition of COBE CV, accounted for 20 percent of sales.

Sorin completed its purchase of COBE CV in May 1999. In granting its approval of the deal, however, the U.S. Federal Trade Commission ordered Sorin to divest the COBE Century heart-lung machine business because of Sorin's overlapping heart-lung business. Also in May 1999, then, Sorin sold COBE Century to Baxter International Inc.

COBE CV was set up as a subsidiary of Sorin Biomedica, reassuming the name COBE Cardiovascular, Inc. At the time of the transaction, COBE had annual sales of about $146 million, and it employed about 840 people at its Arvada headquarters and approximately 950 worldwide. Sorin consolidated its U.S. operations in Arvada, closing down a manufacturing plant in Orange County, California, it had acquired in 1992. Later restructuring moves affected COBE's two non-U.S. plants. The company's manufacturing subsidiary in Gloucester, England, was absorbed into Sorin Biomedica (UK) Ltd., while its Melbourne, Australia, plant was shut down. The sales organizations of COBE, Dideco, and Sorin were also streamlined. (Gambro, meantime, in early 2000 eliminated its last usage of the COBE name when it gave COBE BCT the new name Gambro BCT.)

Sorin Biomedica had been a publicly traded company, controlled by SNIA through a 75 percent ownership interest. In 2000, however, Sorin was merged into and absorbed by SNIA, which restructured its holdings into business units. COBE Cardiovascular became part of the Medical Technology unit.

COBE gained several sister companies in the United States during the early 2000s. In 2001 SNIA acquired Ela Medical Inc. from Sanofi-Synthélabo. Based in Minneapolis, Ela Medical was a producer of pacemakers and implantable defibrillators. In January 2003 SNIA purchased CarboMedics Inc., an Austin, Texas-based maker of mechanical and tissue heart valves. COBE, meantime, was gaining additional traction from cooperative product developments projects undertaken with Dideco and Stöckert. For example, in 2002 COBE introduced its Revolution centrifugal pump which was integrated with Stöckert's SCP drive unit.

In January 2004 SNIA spun off its Medical Technology unit as Sorin S.p.A., which was listed on the Borsa Italiana. Boding well for COBE Cardiovascular's future were Sorin's plans to increase the U.S. share of its revenues from 25 percent to 34 percent by 2008, as well as the Italian parent company's focus on cardiovascular products.

Principal Competitors: Medtronic, Inc.; Terumo Corporation; Baxter International Inc.; C.R. Bard, Inc.; Minntech Corporation; United States Surgical Corporation.

Chronology

• Key Dates:
• 1964: Working out of a garage in Los Angeles, Robert Collins and Randall Bellows establish COBE Laboratories, Inc. to produce custom heart-lung tubing packs; the company soon makes its first foray into the dialysis market.
• 1967: Collins and Bellows relocate their business to Lakewood, Colorado, a Denver suburb.
• 1972: COBE becomes a public company.
• 1973: Acquisition of Galen Laboratories brings the Optiflo Oxygenator into the fold, laying the foundation for the cardiovascular division.
• 1982: The COBE Membrane Lung (CML) Oxygenator is introduced, propelling the company to a leadership position in the cardiovascular field.
• 1988: Cardiovascular division expands into blood processing with the acquisition of the BRAT system.
• 1990: Sweden's Gambro AB acquires COBE Laboratories for about $253 million; the operations of COBE are divided into several subsidiaries, with the cardiovascular division transformed into COBE Cardiovascular, Inc.
• 1998: COBE Cardiovascular introduces cardiopulmonary bypass circuits featuring the SMARxT biocompatible surface; a Gambro restructuring essentially eliminates COBE Laboratories as a subsidiary and transforms the subsidiaries of COBE Laboratories into three units, one of which is Arvada, Colorado-based COBE CV, the former COBE Cardiovascular.
• 1999: Gambro sells COBE CV to Italy's Sorin Biomedica S.p.A., a company majority owned by SNIA S.p.A.; the acquired company once again assumes the name COBE Cardiovascular, Inc.
• 2004: COBE Cardiovascular becomes a subsidiary of Sorin S.p.A., the firm that results from the spinoff of SNIA's medical technology division.