Thoughts on 2014 and 2015

I hope you have been enjoying some time with family and friends this last week in 2014. It’s hard to believe the year is over isn’t it?

Each year in December, we ask all of the business units (SBUs) and global functions (accounting, HR, operations, etc.) to put together a business plan for next year. Those plans are done now, so I sat down to read through them. I also went back to look at last year’s plans for 2014. It’s always fun to look at our predictions and see where we got it right (and where we might have been just a little off).

In this post we thought we would share some of the highlights with you — successes we’ve had, challenges we are facing as an industry, and opportunities we are pursuing.

Before we get into the details, we want to share a patient story with you. The team in Europe created a video to tell the story of a little girl who needed our help. Her name is Mariam. We are grateful to her family for sharing their story. Take a look, but please honor the request of the family to not share the video outside of Cook.

(In some web browsers, you may have to click the Refresh button to make the video appear. On mobile devices, click the image above to start video.)

Thank you to our video and marketing teams for helping to tell Mariam’s story. It’s just one of many but it speaks to what makes Cook such a unique place to work.

Sales growth

So let’s get started with some of the highlights. First let’s look at our sales this year. We’ve had our 51st consecutive year of growth – 5.6% over last year.

Here’s what our growth looks like by SBU and by region.


Some country markets are expanding rapidly, showing impressive sales growth over last year.

This next chart is fun. Just a couple of weeks ago, OHNS, our smallest, start-up SBU hit the $2M sales mark. Congratulations to that team on a great year!

The SBUs weren’t the only growth area for us. Cook Pharmica also experienced a record sales year in 2014. Congratulations!

Overall, these numbers put us in third place for growth among our competitors.

Financial fitness

Sales are just one part of financial fitness in business, though. Just like we all do at home, at Cook we keep an eye on how much money we make, how much we are spending, and how much money we have managed to save.

In 2014, all of these things were going in the right direction for Cook. Sales, operating income, and cash were all up this year — and our debt is down.

One of the areas that we look at very closely is our profitability or operating income. Basically, that’s the money we are able to save after we pay all of our expenses. We watch this closely because profit is what enables us to reinvest in new businesses, buildings, and new employees. We’ve enjoyed 51 years of profitable growth, and we are increasing our profitability, but, to be honest, we have some room for improvement.

Some of the challenges we’ll show you below are bringing the price of medical products down and raising the cost of developing and building new products. This will make it tougher for us to continue to improve our profitability, but we have some ideas to help with that too.

Let’s start by looking at the challenges

Increased regulation

In the last few years we have seen a steady increase in the number and intensity of audits by governments around the world. It’s understandable. They are under pressure from the citizens in their countries to ensure that medical products are safe. Their goal is to protect patients…the same as our goal. So while it may be a challenge to keep up with all the changing requirements, at the end of the day, we all want the same thing: quality products for patients.

As governments seek to eliminate risk from medical treatment, they are creating more oversight of the medical device industry.

More countries are creating medical device regulations, with more complex product testing requirements, higher standards, and unique requirements in each country. Additionally, many countries require product renewals on a regular basis, with re-testing at current standards. This includes products that have been made by Cook since the beginning.

Lawsuits

In the United States there has seen a dramatic rise in class action litigation. We have always taken the approach that if our product didn’t do its job, we would work closely with the physician and patient to make it right. But this new type of lawsuit has less to do with finding out the facts and more to do with just trying to ring up big numbers of lawsuits regardless of the facts. It’s not right and it’s expensive to fight.

Price Pressures

Most countries are trying to reform their health care systems. Usually they are doing that because they would like to spend less money on healthcare. So laws are put in place that put pressure on hospitals and doctors to spend less money, who in turn put pressure on medical device companies to help reduce the cost of products that are used to treat patients.

The good news is that the price of Cook products has stayed pretty consistent. Not up but not down either. These downward pricing pressures will continue to increase in the future, though.

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Seems like a lot of challenges, doesn’t it? There are others, but those are some of the bigger ones. And they are the reason why we need to stay financially fit, and why we will need to continue to evolve our thinking and ways of working. Which we are already doing, as you’ll see below.

Initiatives for 2014 and 2015

Here are a just a few examples of the projects we put in place (some in 2014 and some will be new in 2015) to help address the challenges we see.

Maintain financial fitness

Getting financially fit is obviously a primary focus for us. The more we are aware of our sales, income, cash, and debt, the smarter we will be about managing them.

• Manage our inventory better — Storing large quantities of materials and products costs money—both in space and in the expense tied up in a product just sitting on a shelf. We are paying more attention to how much product needs to be available at any given time and matching our stock to those needs.
  — Our goal is to keep our raw material, work in process, and finished goods inventories as lean as possible and to make sure we always have the right products available when our customers need them. This helps reduce the time it takes to get a product to the customer. It also means that our manufacturing systems are more efficient and use fewer resources.
  
• Get the right price — Hospitals are constantly changing how they buy products, and our systems need to adapt to ensure each customer gets the right price. We analyzed the sales prices of our products in relation to the volume of product each customer was buying. And we were surprised at the results. Now we are doing a better job tying product prices to volume purchased. Pricing shouldn’t be random–it should be based on defined customer and market needs.
• Be smart about how we grow — Over the last few years we have been extremely thoughtful and careful about decisions to add new employees to our teams or to add new buildings to the Cook footprint. That will continue in 2015 as well. This doesn’t mean that we won’t grow. Of course we will. In 2014, we added 178 new employees (including 85 in manufacturing) and built or expanded 5 buildings. But before we make the decision to add, we are going to do everything we can to make sure our existing teams and resources are being used as effectively as they can be. If we need technology to help us do our jobs more easily…we will buy it. If we need to rearrange the flow of products between two buildings to reduce the space it takes to make a product…we will change it.

Align with the changing customer

Our customer has changed a lot over the last ten years. It is not just the physician making the purchase decision these days. Multiple stakeholders–hospital administrators, finance departments, supply chain managers, clinical department managers–are involved in a buying decision today, and they are looking at both clinical and business impact of our products. We are adjusting our approach to serve this new customer.

• Spend more time at outpatient facilities — More procedures are moving from hospitals to outpatient centers or office settings. For example, in 2008, 5.2% of peripheral stenting procedures were done in outpatient settings. In 2014, that rose to 13.1%. We need to be in those facilities more than ever.
• Coordinate business and clinical needs — We developed a Cardiovascular CAM (corporate accounts manager) role that crosses over several SBUs along with HBS.
• Share products — Normally one of our products is sold by only one of our SBUs. But what if a customer serviced by one SBU would like to buy a product sold by a different SBU? Our system sometimes makes this difficult and it shouldn’t. You will see more projects put in place to share products across businesses and customers.
• Get better at conversions — Sometimes a hospital would like to switch to not just one Cook product but all of the Cook products for a department (urology, for example). This is not an easy task. Lots of physicians and nurses need to be trained. It gets even harder when 10 hospitals choose to convert at the same time. We have gotten much better at this over the years, and we will get even better in 2015.

Quality and process improvement

The results of the FDA audit this summer caught us by surprise in a lot of ways, but there were already several quality and process improvement projects in the works. The FDA audit added others, and reinvigorated the teams focused on making us a better, more efficient company. A few of these projects include:

• Reach out to our vendors — We make a lot of our own materials. The teams at Cook Polymer Technologies and K-Tube do a great job making many of the parts that go into our products. But there are some things we buy from vendors. In the last few years, we have had to recall some products because of a part that was not made correctly by a vendor. We are going to work much more closely with our vendors to ensure that their systems continue to improve. As we raise our expectations of quality even higher in-house, our vendors will need to do the same.
• Improve our processes — In addition to the process improvements in manufacturing and quality control that you have been reading about in our FDA audit updates, we are also looking at processes in engineering, marketing, HR, and other departments. Even the cafeteria at P48 was analyzed for efficiency, and improvements were made by remodeling the area and scheduling menus more consistently.
• Get ahead of regulatory expectations — We have done just that when it comes to our response to the FDA warning letter. But we can’t stop there. We have other manufacturing systems and processes that will need to be upgraded too. Over the next year we will begin to examine those systems and dedicate our time and effort to making sure we are satisfied with them.
  — Early next year each of the business units will restart some of their highest priority development projects, and I know they are eager to make up for time lost to the FDA projects in 2014. So, the effort in 2015 won’t be “all” hands on deck. But quite a few hands to be sure.

Audit response

The last half of this year saw an extraordinary, global effort to go above and beyond regulatory expectations. A stunning amount of progress was made to address the FDA audit of Park 48 both in Bloomington and across the globe. THANK YOU to all who worked so hard. It’s not done yet but we are well on our way.

I am confident that our report to the FDA on January 8 will demonstrate just how much work has been completed and that we will easily finish what is left to be done by our next report due on April 1.

Here’s a chart that shows the work completed at Park 48, Ellettsville, and Canton as of today. (Click image to enlarge.)

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Well…if you made it this far, I am impressed. I didn’t intend for the post to be so long, but there is just so much happening that it couldn’t be helped. I suppose it’s no different than any other year in the last 51 years of Cook’s history. There have always been challenges, and there will always be opportunities.

It’s our job to make sure that — despite all the work, initiatives, projects, and programs — we keep our eye on what matters. The products we make today will be used on a patient tomorrow, and their lives depend on the work you are doing right now.

Here’s one more number that should give you something to think about as you ring in the New Year. You’ve had quite an impact.

Thank you all for your hard work and dedication. It is appreciated.

Happy New Year,
Pete