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Sterile Recoveries seeks more of market

A deal to distribute a reusable surgical instrument is meant to ignite the Clearwater firm's sales and stock.

In an effort to boost sluggish sales and trounce tough competition, Sterile Recoveries Inc. has signed a partnership with German instrumentmaker Aesculap to distribute a new product targeting laparoscopic surgical procedures.

The Clearwater company, whose stock is hovering near a 52-week low, previously focused on providing reusable surgical gowns and supplies to hospitals. Now it is introducing Aesculap's reusable instrument that can be used for about 85 percent of all laparoscopic procedures, from removing gall bladders to hernia repairs. Such surgeries, which use lasers, are less invasive than traditional surgery. Aesculap is the largest worldwide supplier of surgical instruments.

Sterile Recoveries will package Aesculap's devices along with its own reusable gowns and drapes for daily delivery to hospitals' operating suites. The supplies are then retrieved and decontaminated at Sterile Recoveries' 11 processing plants nationwide, which are being retrofitted to handle sterilization of Aesculap's instruments.

At its annual meeting Wednesday, the company's executives said they could deliver everything needed for laparoscopic surgery for $650 per procedure, well under the $850 to $1,200 they say hospitals now pay for disposable supplies. The cost savings is particularly important as Medicare and managed care cut reimbursements for the popular procedures.

Sterile Recoveries has expanded its project line with hopes of jump-starting relatively flat earnings. The company's net income was $3.95-million, or 63 cents a share, last year, compared with $3.69-million, or 61 cents a share, in 1998.

The company is trying to carve a niche in the highly competitive hospital supply market by offering reusable products that are as cost-efficient as disposables. When Sterile Recoveries got into the reusable surgical gown business a few years ago, it was convinced it had a better product, better price and better service than its competitors, which sold mostly disposable gowns and coverings for the operating room.

What it hadn't anticipated was that the suppliers of throwaway surgical gowns, powerhouses such as Johnson & Johnson Inc. and Allegiance Corp., would undercut Sterile Recoveries' prices to keep hospitals buying all the disposable products it also sells, from syringes to gloves.

"They weren't going to let an upstart into their marketplace," said Richard T. Isel, Sterile Recoveries' co-founder and chief executive. "It put us under tremendous pricing pressures, and we didn't think we could grow profitably."

Though the company supplies more than 400 hospitals and surgery centers in 23 states, most recently adding a seven-hospital system in Louisville, Ky., Sterile Recoveries' processing plants still are operating at only 50 percent capacity. "The business didn't come in nearly as quickly as we expected," Isel said.

With its new line for laparoscopies, which make up 12 percent to 14 percent of surgical procedures, the company hopes to convert hospitals to its entire inventory of reusable surgical supplies, delivered on a just-in-time basis to hospital operating suites. Isel isn't concerned that his products once again will be undercut by manufacturers of disposable laparoscopic devices, which have about 50 percent of the market.

"We're no real threat to them," said Isel, whose company has just launched marketing and sales of the new product line. "And they've got to be careful with discounts. If they discount the instruments for one hospital on one day, the next day all hospitals will expect that same discount."

Shareholders, who have seen the value of Sterile Recoveries' stock drop nearly 50 percent this year, seem unexcited about the company's new direction. Sterile Recoveries shares closed Wednesday at $6.56, down 19 cents.

Larry Neibor, an analyst with Robert W. Baird & Co. in Milwaukee, has a hold recommendation on the company but hopes there will be improvement. He warns that the process of signing up a new hospital can take up to a year.

"They probably have one more tough quarter, but as we get into the second half of the year, the initiatives they have made should begin to pay off," Neibor said. "But till the transition process is complete, we don't think the stock will be a great performer."