Learning to Live with an LBO: the River-Ivac Story

For this device startup, it looked smart to buy a marketing channel. But when River Medical bought troubled Ivac in an LBO, it got lots more management headaches than it had ever bargained for.

For this device startup, buying rather than building the marketing channel looked strategically straightforward. Managerially, it’s been anything but.

Facing unwelcoming distribution channels, startup River Medical and its chairman Greg Sancoff used an LBO to buy Ivac and thereby acquire a sales and marketing capacity it felt it could not develop on its own. But Sancoff found a company with a bloated bureaucracy, lack of focus on its core business, and poor product development. Working under an LBO-based board of directors and turning around a much larger company have been far more difficult, emotionally and managerially, than Sancoff expected—a warning to others looking to pursue the same strategy. Now Ivac must move into faster-growing markets where it currently has little or no presence, notably managed care and alternate site, in order to counter pressure from the consolidation of its core customer base, hospitals.

Waiting for a table at a San Diego restaurant, Jennifer Sancoff and some women friends met a few executives from infusion pump maker Ivac Corp. “They were exchanging pleasantries,” says Greg Sancoff, the Ivac chairman, “and my wife asked one of them how he was doing. When he found out her name, he said: ‘Your husband just fired me.’ That’s when it hit me that just living in San Diego [where Ivac had been the biggest biomedical employer] was going to be a very unpleasant experience.” Sancoff, who had built two companies in San Diego, “went from being a pillar of the community,” he says, “to somebody no one wanted to talk to.” One article in the San Diego Union-Tribune ran with the headline “Pumped up for Profits: Ivac Leaner Under New Owners, Some Say It’s Meaner Too.”

The role of industrial devil wasn’t the part Sancoff had imagined for himself when he set out to buy a marketing channel for his infusion pump startup, River Medical Inc. Acquiring Ivac was supposed to be a clever solution to a problem faced by nearly all medical device startups: how to create a sales and marketing system in a world of consolidating distribution channels.

With River close to launching its innovative SmartDoseinfusion pump, Sancoff had considered, and rejected, building his own sales force. “The last thing the world needs is another medical device sales force,” he says. He was also mulling a preliminary offer from an acquiror and had begun discussions with a number of potential marketing partners, each of whom wanted exclusive rights in various and sometimes overlapping geographies.

But in the midst of one of these discussions, Sancoff saw another option: River could buy a company in the same business with an existing sales force, a company that needed the new products and reinvigorating innovation a venture startup could provide. Ivac, which was talking to River about a distribution deal for SmartDose, suddenly came up for sale as part of the corporate makeover at its parent, Eli Lilly & Co. Sancoff saw immediate synergies between River and Ivac: while it had been losing share to competitors, Ivac still had the largest installed base of pumps worldwide and a 203-person sales force eager for new products. All Sancoff had to do was refocus Ivac, reinvigorate it with a new product pipeline, and turn its pent-up sales power loose on a market hungry for River’s brand of innovation. Granted, if he could put together the financing to buy it, buying Ivac made a lot more sense than selling out without realizing the full potential of the SmartDose technology or doing a distribution deal which would hurt River’s exit valuation.

Learning toLive with an LBO

Pulling the $190 million together to buy Ivac turned out to be the easy part. “My job the day I bought Ivac was completely different than anything I’d ever done before in my life,” Sancoff says. Ivac was “a huge bureaucratic organization” from which he eventually had to fire better than 25% of the total workforce. Not only did the internal employee resistance at Ivac make the job of turning the company around a tough one, so too did the pressure from its LBO investors. “They expected immediate financial changes,” says Sancoff. “I really missed the boat about what it’s like to do an LBO. It’s a very serious situation when you buy a company with debt.”

Almost a year after Sancoff arranged to buy Ivac in an LBO, the turnaround looks like a budding success. Sales for the first nine months of 1995 are up a modest 6.5% over the same period for 1994, but the accounting line on which his LBO investors are focused—EBITDA (earnings before interest, taxes, depreciation, and amortization)—is up a dramatic 76%, thanks largely to $24.4 million in savings, mostly from big reductions in headcount, a realigned sales force and streamlined R&D effort. Ivac’s earnings easily pay the carrying costs of the $160 million borrowed to buy it.

But Sancoff is hardly recommending the strategy to other entrepreneurs, many of whom confront the same devil’s choice that River faced—build a sales force or find a marketing partner—and eye the same logically straightforward solution of acquiring the distribution.

The problem is that any company with both the requisite marketing capacity and a price a startup can afford will likely be a seriously broken company. And fixing broken companies isn’t the skill most entrepreneurs have developed, says Sancoff, who eventually brought in as CEO William Mercer, a 17-year Mallinckrodt Group Inc.veteran, to supervise the process he had started but never planned to continue managing long-term. Sancoff himself now lives nearly 3000 miles away from Ivac, in New England, where he remains chairman of the board and is responsible for the broader long-term strategic planning for the company. “If your goal is to run a startup company,” he continues, “and you’re enjoying that, you’d better look at what’s going to happen to you and your executives. You’re going to spend two years of your time and your staff’s time trying to fix this situation. You have to ask yourself: is that something your team has the skill set to do?”

Why the World Needs a Better Infusion Pump

Greg Sancoff has never had to be a turnaround artist. An entrepreneurial inventor, he’s worked in his own companies since he graduated in 1976 from Andover (MA) Vocational High School, immediately after which he formed a company to machine complex prototype systems, such as computer components. Moving to California after selling the business, in 1985 he started a San Diego-based engineering consulting firm which specialized in rapid development of medical devices for clients such as Ivac, Advanced Medical Inc. division Imed Corp. , a rival pump company, and Johnson & Johnson . Sancoff’s Block Consulting turned into Block Medical to focus on the home infusion therapy market, making disposable and ambulatory infusion pumps. His company went from 14 employees to 250 and revenues from $5-20 million. In November 1991, Hillenbrand Industries Inc. bought Block for about $80 million.

Sancoff stayed with Block for about 6 months, took some time off and then decided to start River Medical. The goal was to build on the basic idea of creating a low-cost disposable pump for the hospital industry, an area that other companies hadn’t addressed.

Most hospital IV drugs are mixed item by item by hospital pharmacists. To do so, they draw saline or dextrose solution into a mixing bottle, add the proper lyphollized drug, and then inject the mixed solution into IV bags, two or three of which are usually sent up for each patient on the theory that providing too much drug to the floor is better than having to mix everything again.

Unused drug is thrown away since once the drug is mixed, it has a relatively short useful life. Abbott Laboratories’ Add-Vantagesystem to some extent deals with these limitations because the drug is mixed at point of use (See “Infusion Confusion,” IN VIVO, May/June 1986). But Add-Vantage is gravity based and most be hooked up to an electronic pump in order to control the drug’s flow rate. And since it hangs from a pole, the patient’s mobility is limited.

River’s Jewel: SmartDose

River was formed in the first quarter of 1993 to create a disposable and ambulatory pump which would allow nurses to mix the drug right at the patient’s bedside, eliminating most of the pharmacist’s work and the waste from thrown-away, unused IV bags. Moreover, the River product would pump the drug at a controlled rate, effectively doing the work of a mechanical pump without any electronics.

Supported by a total of $10.3 million from Menlo Ventures, Henry Ventures, Institutional Venture Partners and Avalon Ventures, River eventually created SmartDose. The pump consists of three main parts. In the middle is a mixing cell/container usually filled with saline or dextrose solution. On the container’s right side is a port for receiving lyphollized drug from a standard syringe or drug vial. On the left side is a chemical “power cell”. The floor nurse uses the syringe or vial to inject lyphollized drug into the mixing cell, which can be hooked up to an IV line. When a button is pushed, a sodium carbonate timed-release tablet, enclosed in a membrane, is released into the power cell container. The pressure from the resulting chemical reaction pushes the drug at a controlled rate from the container into the IV line. When the drug is used up, or when therapy is discontinued, the whole package can be thrown away.

The advantages: cost-effectiveness and the whole system is portable (a patient can walk around with the pump working away, stashed in a fanny pack or handbag). With an effective selling effort, Sancoff saw SmartDose, including the drug in it, reaching $300 to $500 million in sales within five years, with the therapeutic contributing 50% of the value of the product.

Sancoff and his engineers spent the first year of development performing thousands of chemistry experiments on the power cell, looking for the right ingredients to ensure a consistent, steady reaction over a long enough period of time. Much of the rest of the time was spent both engineering a material that would be completely inert to any drug that could be added to it and creating the manufacturing automation that would produce the SmartDoseas cheaply as possible: the aim was a manufacturing speed of 60 parts per minute.

The Distribution Dilemma

But if making the product was nearly as big a problem as inventing it in the first place, figuring how to sell it posed an even more impressive challenge. For all new medical devices, marketing channels are narrowing. Getting new products in front of medical professionals, let alone the buying committees who now frequently make most of the big-ticket decisions, is problematic at best. But for a new sales force from a new company to sell a new product into a competitive marketplace is nearly impossible.

Apparently, at least one company—Abbott, according to a former Ivac employee—was interested in buying River outright, for what Sancoff estimates would have been around $50 million, a reasonable, though not exciting profit to investors. The suitor wasn’t willing to sweeten the deal with an earn-out package based on what River could do with SmartDose. In such deals, the acquired company is given target sales or profit levels: the higher the acquired business can drive its sales, the higher the earn-out the acquiror pays. But in this case, the economics of the marketplace, and thus of the acquisition, made it imperative that River’s product be fully integrated into the acquiror’s marketing team. And once integrated, River executives wouldn’t be able to assure that SmartDosesales met the terms of an earn-out.

River’s best alternative thus looked to be finding a marketing partner, and several companies were interested in playing that role. According to Sancoff, one of the largest IV companies had been chasing River to do an exclusive US marketing deal, while a major European pharmaceutical and device player wanted exclusive international rights. Ivac, too, was talking to River about buying $80 million worth of SmartDoseproducts over five years.

The first problem with the propositions, Sancoff felt, was that they imposed valuation limits. Says Sancoff: “If we had done a large deal with a major distributor, the value of our business would have been diminished quite a bit. If you’re going to do an IPO, you can’t tell investors that 95% of your sales are being done through one product supplier—they’d see us as an incomplete company. We wouldn’t know who our customers were and we wanted to control access to the customer.” A distribution deal would also have hurt River’s acquisition chances. “Who would want to buy the company other than the major distribution company whom we were already doing business with?” asks Sancoff (See “Device Startups and Alliances,” IN VIVO, July/August 1995). But apart from diminishing its take-out valuation, an exclusive deal would have hurt what Sancoff and CEO Mercer feel is one of River’s biggest revenue-generating opportunities: partnerships with drug firms. Sancoff and Mercer want to package SmartDose pumps with premixed drugs in exclusive partnerships with the drugs’ makers. Such products would eliminate nearly all the pharmacist’s extra work, provide the drug partner with a drug delivery advantage over competitors and offer cost-saving bundling opportunities for buyers. River’s vision: a set of exclusive partnerships for proprietary drugs in each major drug class (e.g., antibiotics, oncologics, and imaging agents) as well as an arrangement with a generics supplier for a broad variety of drugs.

But if River were tied to a major hospital supplier, a drug company could easily be spooked away, Sancoff reasoned, particularly as suppliers like Baxter International Inc. and Abbott move into new businesses. Abbott, for example, is a major player in injectable generic and branded pharmaceuticals and is pushing into imaging agents. And such partners would undoubtedly want their own drug products in the River system. “It’s better, and cleaner, to be able to pick the best partner in each therapeutic category,” says Sancoff.

Financing? No Problem

A River-Ivac combination thus made great sense to Sancoff when Lilly announced it was for sale. River would control its own distribution network and add significant value to it through SmartDose. At the fall board meeting when he was presenting River’s various strategic options, he recommended buying Ivac.

Sancoff spent the next several weeks visiting the larger venture capital firms, pension funds and LBO financiers, some of which had already turned down the opportunity to buy Ivac themselves. They couldn’t see, says Sancoff, how they could cut costs deeply enough to justify the debt load or expand sales fast enough. But Sancoff knew Ivac well, through friends, through several employees at Block and River who had worked at Ivac (his own wife was a five-year Ivac employee), as well as through his own experience as a consulting engineer for the company. He presented his potential investors with the revenue-expanding opportunities he foresaw with SmartDoseand with a plan to cut $27 million in expenses from Ivac.

He argued that while Ivac didn’t have the multi-product bundling capabilities of major competitors like Baxter and Abbott, its product line didn’t require them—contrary to popular opinion. He also told investors that the pumps, which last more than five years, are bought more on quality and brand loyalty than on mere price (which nonetheless doesn’t allow any one company to charge a premium for its brands). As evidence, he showed that Ivac’s share position, while slipping, still held at number one or two in most major categories, despite a dearth of new product offerings. Thanks to “great old products, a great sales force and great customer service,” says Sancoff, River could count on Ivac’s customer loyalty in the face of much larger bundlers.

Within weeks, Sancoff says, he had offers from, among others, the LBO firms of Bain, Warburg Pincus and DLJ Merchant Banking. He chose DLJ, says Sancoff, because it would allow him to do an all-cash, no contingency deal, a highly attractive option to any motivated seller. It invested about $30 million in equity, taking 50% of the new Ivac Holdings (which owns River and Ivac), and provided an $80 million bridge loan. The other $80 million came in a loan from Chemical Bank. “I’m told we weren’t the high bidder,” says Sancoff. “But Lilly felt they had the fewest financing risks with us since it was an all-cash offer. And they saw the strategic fit.”

The deal closed December 31, 1994—and Sancoff began his new job. He took to Ivac only a secretary and River board member and investor Albert Henry, a former Imed CFO and director, to help with the corporate and financial examination and draw up all budgets for the company. Henry and Sancoff essentially spent the next four months full-time at the company. Why did he bring no one else from River? “It was going to be difficult enough [for River] with me spending all my time at Ivac,” he says. “We didn’t want to dilute River’s [management] resources.” Indeed, for the first five months, River operated completely independently.

Why Should We Listen to You?

But while he had insulated the River Medical executives from the potential problems of taking on Ivac, he certainly hadn’t prepared himself for what he saw on day one as an owner: “The reality that I might have to start disassembling and rebuilding the company.” As for the personal environment: “It was nasty when we got there—my secretary used to go home crying two or three times a week.”

Given that Ivac was losing market share and feeling the competitive pressure of bigger competitors and ever more price-sensitive customers, “I had thought that people would welcome the chance to revitalize the company, to work in what I started calling a big startup,” says Sancoff. “Instead, it was amazing how many people said ‘We don’t want to work for a big startup.’” According to Sancoff, 10% of the people who left the company did so voluntarily. “People resisted the idea that they were to be responsible for completing tasks, no matter what.” “So [when Sancoff began to insist on accountability] there was this immediate and huge resistance. Some weren’t going to work past five o’clock for anybody.”

At least part of the problem, according to Sancoff, was that Lilly’s culture had been ingrained into Ivac. Policies and procedures were written in Indianapolis, with a Lilly-sized company in mind. Ivac was “a $230 million company with the internal controls of a billion dollar business.” For example, it usually took six months to increase a salary since many supervisors had to approve it; when Henry and Sancoff tried to change the procedure so that the only approvals required would be those of the employee’s immediate supervisor and the corporate officer in charge of the department, employees balked, even though some might have benefited from the faster approval. When Sancoff brought his kids into the office to play while he worked on weekends, something he had done frequently at River, he was told “it was against procedure. I said, ‘Change the procedure.’ They said they couldn’t. ‘What do you mean you can’t change it?’ I said. ‘I own 14% of this company. I run it.’” [Sancoff changed the policy to allow all employees the same opportunity.]

But few of his new employees, in fact, believed he did run Ivac—any more than any other Lilly-sent CEO had run the company. “Why don’t people get it?” he asked an engineer a week after he had arrived, referring to the changes he was trying to implement. “Why should we listen to you?” responded the engineer. Lilly had put a new CEO into Ivac every 3-4 years, and no one listened to any of them. In short, says Sancoff, “they looked at me as just one more in a line of CEOs who come in waving their hands about change but who never did anything.”

The unexpected resistance from within Ivac slowed progress, hurting morale. Middle managers, who were responsible for supporting upper management, were uncooperative, which led to greater confusion. If he has one regret, it’s that he didn’t communicate enough with employees from the start, says Sancoff. “A lot of people don’t know how to deal with downsizing. The managers were emotionally upset. I underestimated the attention that they needed early on to get their full support.” Sancoff brought in outside counselors and paid $5 million in severance to departing employees, but the counselors perhaps should have been brought in earlier, he adds.

Sancoff believes that the resistance to change exhibited by Ivac employees as soon as he arrived didn’t stem from any immediate cost-cutting moves. Quite the contrary, he says: there were virtually no layoffs until after he had had time to study the company from the inside. On his first day on the job, he says, he told the assembled employees that his priorities were revenue generation and customer satisfaction, not cost-cutting.

But former employees say they also felt betrayed by Sancoff’s downplaying of any big layoffs. There were, in fact, three waves of layoffs: in February, in the April-May period, and in September, when roughly 100 people left, most of them with significant time at the company and therefore relatively high salaries. Says one former manager, it was clear that this third wave of layoffs was driven by DLJ’s “push to increase EBITDA” to prepare the way for an eventual IPO. Since sales weren’t growing fast enough, he says, the company needed to cut costs to beef up the bottom line. Sancoff says that DLJ was not interested in merely short-term progress. But responsibility for the turnaround clearly hung heavily on the shoulders of management, who recognized that DLJ wanted quick progress and change.

Refocusing Ivac

In changing Ivac’s culture into the “big startup” culture he envisioned, Sancoff’s most important move was to replace or switch to new jobs 50% of Ivac’s senior officers, which he did largely after a 30-day period of intensively getting to know the company. Much of this knowledge came through meetings with employees. “We asked them how this company could work better; what were we doing wrong? The engineers, the people who talk to customers and fix and design products told us a lot of what we should do. Sometimes they would say ‘You don’t even need me.’” Plenty of people left: from about 1400 employees, Ivac dropped to about 1000 (not including 440 workers at its Mexican plant).

But while the downsizing certainly reflected cost-cutting measures, it also reflected the refocusing of Ivac. “It was a perfect example of a company owned by a large pharmaceutical parent who hadn’t focused on it,” says Sancoff. “Ivac had done a few things very well for many years—drug delivery systems and vital signs equipment. But it had gotten off that focus,” adopting what Sancoff saw as an almost pharmaceutical approach to its business.

Like a drug company, Ivac aimed its R&D at high-risk, breakthrough products, often outside the company’s true technological expertise. It had spent millions, for example, on a closed-loop drug delivery system to control blood pressure continuously at one equal rate. But the sales force wasn’t trained to sell that kind of product and the device, almost fully developed, was never marketed. Sancoff shut down another project for non-invasive blood pressure measurement, a product that would take the reading through the patient’s skin. “It would have been wonderful,” says Sancoff, but making it reliable over the range of patients on which it would have to be used represented an enormous scientific challenge. Meanwhile, Ivac was passing up opportunities to develop more standard measurement devices and pumps where the level of innovation could still be high but which were also technologically do-able within a reasonable time frame.

“Ivac,” says Sancoff, “was always in the wrong place at the wrong time with the wrong product.” In its earlier days, for example, Ivac had been the first company out with an electronic thermometer; but well into Lilly’s tenure, it became the last major player to come out with an infrared thermometer, a class of devices which has taken the market by storm. “They had spent five years and $25 million on their newest product [the SignatureEdition],” says Bill Mercer. Once Greg came in, they made more progress in ten months than they had in the previous five years.” One big problem, says Sancoff, was that researchers weren’t held accountable for R&D projects, which stretched new product development cycles to an average of 4-5 years. “That’s unacceptable today,” says Sancoff. “You have to be able to develop a product within two years if you’re going to be successful.”

Enter Big-Company Management

Ivac was also held back by its organizational structure, Sancoff contends. For example, the engineering department’s 140 engineers were responsible not only for all quality and regulatory functions, but for all documentation as well. “No wonder they couldn’t get everything done,” says Sancoff, who separated out the functions. He moved Anthony Semedo from VP of quality and regulatory affairs to VP, R&D—an area where Semedo had experience. Says Mercer: “Tony had introduced the last new pump at the company and had the confidence of the sales force that he could get that product out.” Replacing him in the quality and regulatory department was Sally Grigoriev, a former colleague of Sancoff’s at Block Medical, and most recently at US Medical Corp.

By the same token, Ivac had been allowed to drift in its marketing focus. Despite the mushrooming importance of group purchasing and managed care, Ivac had treated these new buying influences with, says Bill Mercer, “benign neglect. There was no national account activity to speak of—a few people, but no one capable of putting together deals and relationships.”

In addition, Ivac ran into a competitor, Imed, which had done some very innovative deals with leading hospital groups such as VHA, where Imed became part of its technology development program, and American Health Care Systems (now AmHS/Premier), which has an investment in Imed through its technology investment arm. In addition, say some industry observers, Ivac’s corporate marketing programs were often under the sway of Lilly’s broader agenda during a period when national contracting was not a high priority for the drug firm.

To help realign the marketing and sales strategy, Sancoff brought in Clark Adams, a former marketing VP and co-founder of Pharmacia AB division Pharmacia Deltecas head of marketing and business development; to head up national accounts, they hired Dave Ricker, a former senior executive at Premier Health Alliance Inc. Says Mercer: “We shifted resources to align ourselves with the new market. We increased telemarketing; we reduced the number of nurses in the field; we created a whole new area of sales support.”

But by far the biggest change was recruiting Bill Mercer. Says Sancoff: “I’d identified from the very early days of the acquisition that we had to have a person that had the skill set to continue to run and build the company.”

Mercer had that skill set. He had managed and helped put together Mallinckrodt’s imaging business and for the previous two years had been turning around its troubled veterinary business. Built from a series of acquisitions that had never been integrated, the division was floundering: Mercer apparently spearheaded the process which, he says, cut 33% of its employees, closed 11 of 27 facilities, centrallized R&D into a single facility, shut down or sold a number of unprofitable product lines, and took operating earnings up better than 30% (See“Imcera Reinvents Nichemanship for the Managed Care Era,” IN VIVO, October 1993).

Mercer arrived at the end of May, after the first firestorms of changes in the company, and has been primarily focusing on fine-tuning the organizational structure, its R&D strategy and various business development activities, including the pharmaceutical partnerships (he has deal discussions with three branded companies and one generic firm now ongoing).

Success Doesn’t Come Cheap

That Mercer now runs Ivac is an indication of both Sancoff’s desire to get out of the day-to-day emotional issues of heading the company as well as his sense that it needed a more professional manager. Indeed, Sancoff went outside his inner circle at River to look for new Ivac management, believing that entrepreneurial executives may not have the skill set to run a larger, and especially a troubled, operation. “A lot of managers might tell the officers in the startup that they’d be given big roles in the acquired company—but I wouldn’t do that,” says Sancoff. “The people hired for startups have completely different skills than people who can run departments at large companies.”

For example, he says, an R&D director at River needs to be involved in all aspects of the R&D process. At a company Ivac’s size, he says, an R&D director needs to be a good organizer and manager—but he can’t allow himself to oversee all aspects of the operation.

In the year since the LBO, Ivac has become a stronger company, both in its markets and on its balance sheet. It recently completed a $100 million debt offering to replace the higher-cost bridge loan from DLJ and part of the Chemical Bank $80 million debt. The company also recently sold a building for about $26 million, money which will also go to paying down debt, which is now a relatively manageable $125 million. According to Sancoff, sales of the new River pump and Signature, both of which were launched on a full-scale national basis early this month, are strong; Signature, in fact, is on back order, he says.

Sancoff looks to have been right about the dangers of bundling: a year after the acquisition, Ivac continues to maintain its leadership position in the hospital infusion market. “I think hospitals have learned that they don’t want to buy instruments from the same company which is making solutions, syringes, bandages and drugs—given the lifecycle of a new infusion pump, the buying decision is too critical. Buyers want to look at some of these technologies separately.”

Furthermore, under the direction of Adams, whose former company, Deltec (now owned by Smiths Industries PLC.), dominates the alternate site infusion pump business, Ivac is moving into the much faster-growing alternate site market, which it had previously ignored. Several Signaturemodels are being designed specifically for this market, Adams notes, and the company is negotiating with potential pharmaceutical partners to help market and distribute drug delivery systems to alternate site customers, hoping to capitalize on areas in which Deltec is weak.

Ivac’s ability to get into that market is critical, particularly since its major customer base, hospitals, are consolidating and have excess capital equipment, including infusion pumps, says Frank Brown, CEO of Imagyn Medical Inc., and former president of Pharmacia Deltec. Brown, who participated in a group that looked at buying Ivac from Lilly, and at one time had considered merging Ivac and Deltec, says that what makes Ivac exciting now is the SmartDosetechnology. “But they’ve got to resolve the R&D issues, make drug deals, get the SmartDose launched successfully, and get into the ambulatory business, most likely by acquiring assets,” he observes.

In short, Ivac faces significant challenges—particularly in the alternate site market which poses one of River’s major opportunities. Not that the challenges can’t be overcome. Deltec, which currently has 80% of the alternate site market, is vulnerable, says Brown. It hasn’t responded well to pricing pressure and, perhaps more importantly, is managerially adrift: It hasn’t had a president for a year and has lost key marketing executives.

But making Ivac into a winner will be no slam dunk. A year after the deal, Ivac certainly looks healthier. But its success has not been bought cheaply. Sancoff and many other people tied to both River and Ivac have been through an emotional gristmill. And while the increase in EBITDA encourages investors, Ivac still needs big sales increases which have, in its first year of independence, eluded it.

The SmartDosetechnology, upon which the company is banking heavily, has yet to prove itself in the marketplace; some former employees raise questions about Ivac’s ability to manufacture both the SmartDose and Signature at low cost and with consistent quality. River, which was seen as the driver of the acquisition, virtually no longer exists outside of its product, and its major alternate-site opportunity is tied to a hospital-focused company. “Conceptually, the SmartDose technology is dynamite,” says a former employee. “But it’s expensive and complicated to manufacture and it isn’t clear that the market will want to pay for it.” To bring down manufacturing costs, Ivac will have to grab market share, and it isn’t clear yet that the company has the clout with managed care and large buyers to battle Abbott and Baxter, he adds.

On the other hand, ask investors, what choice did River have? Any company it could have afforded would have had similar financial and managerial problems. And wouldn’t building a brand new distribution capacity have been even riskier? The answer, for Sancoff, is still clearly “Yes”; in fact, he has formed a new company, Mill Pond Co., to identify similar turnaround opportunities. But as he cautions, this kind of deal isn’t for the faint of heart.—RL, WD