United States Surgical Corporation History

Address:

150 Glover Avenue
Norwalk, Connecticut 06856
U.S.A.

Telephone: (203) 845-1000
Fax: (203) 845-4478

Wholly Owned Subsidiary of Tyco International Ltd.
Incorporated: 1964
Employees: 5,400
Sales: $1.17 billion (1997)
NAIC: 339112 Surgical and Medical Instrument Manufacturing; 339113 Surgical Appliance and Supplies Manufacturing

Company Perspectives:

As we begin a new decade of innovation, U.S. Surgical continues to expand through internal development and strategic acquisitions. Numerous technological breakthroughs and product innovations are providing a platform for growth. We are proud of our work ethic and culture dedicated to exceeding customer expectations. 'Here to help' is the cornerstone of our culture. Every employee is here either to help advance patient care and/or to customize solutions that meet the specific needs of our customers. Key Dates:

Key Dates:

1964:: Leon Hirsch incorporates United States Surgical Corporation (USSC).
1967:: First products are sold, most notably the surgical stapler.
1972:: Company begins hiring experienced salespeople and giving them medical training.
1980:: Following charges of illicit sales practices, USSC revamps its sales management and fires 20 employees.
1984:: USSC reduces its earnings claims for 1979 to 1982, following SEC investigation.
1987:: USSC introduces absorbable staples and the Surgiport trocar; the latter eventually opens the door to laparoscopic surgery.
1990:: USSC introduces the 'Endo Clip,' which enables laparoscopic gall bladder removal.
1991:: Sutures are added to the company's product line.
1992:: USSC's stock peaks at $134.50 in January; revenues for the year surpass $1 billion.
1993:: Competitive pressure and marketplace changes lead to quarterly losses, a $130 million restructuring, and a year-end stock price of $22.50.
1995:: Surgical Dynamics Inc., maker of spinal surgery products, is acquired.
1996:: Hostile bid for Circon Corp. is launched.
1998:: Electrosurgical device maker Valleylab is acquired; USSC is acquired by Tyco International Ltd.; hostile takeover of Circon is terminated.

Company History:

United States Surgical Corporation (USSC) is a leading producer of tools for use in surgery, including staplers, sutures, laparoscopic instruments, cardiovascular surgical products, and electrosurgical devices. The company was founded in the 1960s by an entrepreneur who had no background in medicine but had an idea about how to use staples in surgery and pioneered the development of this market in the United States. In the late 1980s USSC introduced another innovation in surgical techniques when it began to market tubes and other devices that allowed operations that were far less invasive than conventional procedures. On the strength of this new technique, the company's fortunes soared in the early 1990s, only to be deflated in the mid-1990s as uncertainty in the healthcare industry as a whole set in. Under increasing pressure from competitors, USSC in 1998 agreed to be bought by Tyco International Ltd., thereby becoming a subsidiary of the Bermuda-based conglomerate.

Surgical Staples Origins

USSC was founded in 1964 by Leon Hirsch, the owner of a small, unsuccessful dry-cleaning equipment business. With only a high school education, Hirsch nevertheless had an avid interest in gadgets and in biology, and he often stopped by the office of a patent broker in New York City, where he lived, to see what was around. One day in the spring of 1963 he happened across a wooden device on the man's desk that looked like a shillelagh. Hirsch was told that the mystery object was used by doctors in Hungary and Russia to make stitches, instead of silk thread, as was used in the United States.

The surgical stapler, as it was known, had first been invented in Hungary in 1908, at a time when many surgery patients died of infection from contamination of their wounds. With the stapler, an area inside the body could be clamped off before any cutting was done, which dramatically reduced the loss of blood and other fluids. However, the stapler was extremely cumbersome and time consuming to use. It took two hours to assemble, and a second person had to feed individual stainless steel staples into it with tweezers in order for a surgeon to use it.

Looking at the stapler, Hirsch had the inspiration that a disposable cartridge of staples would simplify the instrument's use enormously. In the basement of his house, he made a prototype cartridge stapler out of balsa wood, and then spent $75,000 of his savings to have a metal version of his model made. Two surgeons at Johns Hopkins medical school in Baltimore tested the new device, and on the basis of their strong recommendation, Hirsch was able to line up $2 million in financing from two other investors to develop and market the product. In 1964 he incorporated the United States Surgical Corporation, with four employees.

From 1964 to 1967 Hirsch and his partners worked to refine their prototype and to develop a variety of other surgical instruments. They made this effort so that they would be able to spread the costs of their marketing activities among a number of different products. In 1967 USSC finally began to sell its products, distributing them through wholesalers of surgical supplies. The company's main product, the surgical stapler that Hirsch had first developed, looked like a stainless steel wrench. It had a hooked end, and a slot for a staple cartridge. A surgeon placed the hooked end around the area to be closed, tightened the clamp, and then pulled a trigger to insert the staple. With this device, blood loss and injury to tissue was minimized, and time spent in surgery was sharply reduced. The device was used primarily for abdominal and thoracic surgery when it was originally introduced.

In its first two years, USSC successfully sold staplers to a large number of surgeons. In 1967 sales totaled $350,000. By 1969, the company's sales had reached $1 million. The company, however, had also racked up $1 million worth of losses. Surgeons were buying the stapler, but they were not using it; USSC had counted on making its money from sales of the staple cartridges, which were disposable and had to be purchased again and again.

The company found that surgeons were instinctively cautious and conservative in the operating room, reverting in an operation to the techniques they knew best and had been trained to use. Only those surgeons who had been personally trained in the operating room by one of Hirsch's employees had made the switch to regular staple use. USSC tried a number of different solutions to the problem of how to combine sales with training. First, 20 registered nurses were hired to act as technical instructors, training surgeons in the use of staplers in the operating room. This method worked, but it proved too expensive to be practical.

Then, Hirsch hired medics and paramedics leaving the army, and asked them to sell the stapler and to train surgeons. Although they had a sound medical background, Hirsch found that they were poor salespeople. Finally, in 1972 USSC hit upon the solution of hiring experienced salespeople, and then giving them medical training. The company developed a 240-hour course that covered many aspects of basic medicine, which was supplemented by 40 hours of training in an animal laboratory, where actual surgery was done. Overall, the training of each salesperson cost $8,000. To motivate its sales force, the company paid no regular salaries to salespeople, but only commissions, and dismissed employees quickly if they failed to perform well.

By the late 1970s, these efforts, as well as a high pressure corporate culture, had driven USSC's sales to new heights, allowing the company to grow rapidly. From a base line of 20,000 patients who had operations with staples in 1969, the company's market had grown to include 700,000 patients. In addition, the company had expanded its operations to Europe, training sales representatives to begin introducing surgical staples in that market.

At this time, however, clouds began to appear on the horizon. As USSC had contracted out its manufacturing when demand for its product grew, the company's standards of quality control had slipped. To ameliorate this problem, USSC began to build new factories for its products in Puerto Rico and North Haven, Connecticut.

Late 1970s and Early 1980s: Increased Competition and Allegations of Illegal Practices

For many years, USSC had the surgical staple market largely to itself. In 1977, however, one of its main competitors, Johnson & Johnson's Ethicon division, entered the surgical staple market with a disposable stapler, which eliminated the need for the costly cleaning and maintenance of the reusable stapler. The Ethicon stapler immediately became popular, and temporarily captured a large portion of USSC's external wound closure market.

To counter this threat, USSC launched a four-year, $100 million development program to make up lost ground. The company announced that it would market its own disposable stapler, and that it would also move into new areas of medical supplies, such as intravenous feeding sets and electronic vital signs monitors. These new products would have their own sales force.

Also in 1977 USSC decided to replace its network of independent distributors with its own operations. In response, one of its unemployed distributors moved to Australia and set up a competitor to USSC called Hospital Products, Inc., which began to market very similar products in the United States and Australia. USSC responded by suing Hospital Products, Inc., for a variety of infractions, including patent violations and misrepresentation. Hospital Products responded with legal action of its own, charging unfair competition and antitrust violations, and the cluster of suits provoked a frenzy of backbiting and name-calling that went on as the legal actions dragged on into the mid-1980s.

Despite its rapid growth throughout the 1970s, USSC allegedly began in 1979 to engage in a series of illegal practices that were designed to inflate its sales figures. As the Securities and Exchange Commission (SEC) later claimed, the company used fraudulent accounting practices and shipped faked or nonexistent orders to pump up its sales figures. In 1981, for instance, USSC claimed profits of $12.9 million, when in fact the SEC calculated that it had earned only $200,000. In February 1984, under pressure from the SEC, USSC agreed--without admitting or denying the charges&mdashø cut its earnings claims by a total of $26 million for the years 1979 to 1982, and some of its managers agreed to give back bonuses they had earned in earlier years for fraudulently computed sales gains.

In addition, USSC was charged with a variety of illicit sales practices, all of which pointed to an atmosphere of extreme pressure within the company to sell. Salespeople complained that they were forced or encouraged to dump USSC products on hospitals and to engage in a number of dishonest practices, such as hiding products, stealing them, wasting them, writing phony orders, adding zeros to numbers on order forms, and sending products that had not been ordered and then refusing to take them back. In 1980, in response to complaints from hospitals about overshipment, USSC revamped its sales management and fired 20 employees. In 1983 the company also moved to reduce pressure on its sales force by changing the structure of its payment from 100 percent commission on increase in sales, to half salary.

Despite these difficulties, by 1982 USSC's sales had risen to $160 million. Although the company's growth slowed in the following year, as cost-conscious hospitals cut back on inventory, the company's sales nonetheless rose to $180 million. By 1984, USSC controlled 90 percent of the market for internal surgical staples and the majority of the market for external, skin staples.

USSC had diversified its product line to include 13 more products in 1981, and in 1984 it introduced a new technological breakthrough: absorbable staples, which made staple removal unnecessary. While absorbable suture thread had existed for years, the company's new product introduced this quality to the stapling procedure. In the mid-1980s USSC also embarked on a program to enter the suture market. In 1987 the company won a ruling from the Food & Drug Administration streamlining the process for approval of new suture materials, and it announced plans to introduce its suture materials by the early 1990s; USSC entered the suture market in 1991.

Late 1980s and Early 1990s: Skyrocketing Fortunes from Laparoscopic Devices

By far the most important development of 1987 for USSC, however, was the introduction of the Surgiport trocar, a disposable tubelike device through which other surgical instruments were inserted into the body. The company had purchased exclusive rights to this technology from a company called EndoTherapeutics in the previous year. This gadget eventually opened the door to laparoscopic surgery, in which very small incisions were made in the body so that a camera could be inserted, enabling a surgeon to operate using instruments channeled through narrow tubes. This technique reduced the need for large incisions, which required long periods of recovery for the patient.

In the late 1980s USSC came under fire from animal rights activists for its use of dogs as laboratory animals. For years, the company had used hundreds of dogs to train its sales force in surgical techniques, and also to train doctors in the use of its instruments. Activists complained that these practices were unnecessary and constituted cruelty to animals, and the company was plagued by a number of vociferous protest demonstrations. In 1988 a bomb was placed near Hirsch's parking place by an animal rights protestor, but USSC's company security had infiltrated the movement and was able to prevent the bomb from doing any harm.

Contrary to the wishes of the animal rights protestors, USSC's financial fortunes skyrocketed in the early 1990s. Although the company sold only $10 million worth of laparoscopic tools in 1987, three years later the company introduced the 'Endo Clip,' which allowed laparoscopic gall bladder removal, and the market for these tools began to grow rapidly. Soon, laparoscopy was also being used for hernia operations, appendectomies, hysterectomies, and other types of abdominal surgery.

With a virtual monopoly on sales of the equipment for these operations, USSC saw its sales grow by 50 percent in 1990 and 75 percent in the first half of 1991. Earnings during that time grew by 78 percent, and by the end of the year, they had nearly doubled since 1990. USSC sold more than $300 million worth of laparoscopic equipment in 1991, to become one of the fastest-growing companies in the United States, with profits of $91 million. The company's stock price kept pace with its spectacular increase in business, and many of USSC's executives who owned stock found themselves millionaires.

Hirsch predicted ample room for growth in the laparoscopic field, as the technique was adapted to an ever greater number of surgical tasks, and USSC set out to market a package of laparoscopic tools, surgical staples, and sutures. In addition, the company began a major push to market its products in Europe, building a new sales and distribution center in France. Overall, one quarter of USSC's revenues came from foreign sales.

By 1992, 85 percent of all gall bladder procedures in the United States were performed using laparoscopic techniques. At the end of that year, USSC's revenues had topped $1 billion, of which half was contributed by laparoscopic products. The company's stupendous success with these instruments had attracted a competitor: industry giant Johnson & Johnson formed Ethicon Endo-Surgery and vowed to introduce 40 competing products. In response to this threat, and the presence of other competitors in the field, USSC brought suit alleging patent infringement.

Mid-1990s: Declining Fortunes

In January 1993, USSC won a suit against a subsidiary of Eli Lilly & Company in which its opponent was ordered to stop making and marketing its products. By the middle of the year, however, the company's luck had changed, as its sales dropped dramatically in the face of fierce price competition from its other competitor, Ethicon. In July 1993, USSC reported a quarterly loss of $22 million. A switch in distribution practices, to a more prompt just-in-time delivery system, caused an unexpectedly sharp fall-off in sales, as hospitals used up the backlog of products that had stockpiled on their shelves, confident that they could acquire more when they needed them.

By September 1993, USSC was still struggling with the effects of a vast oversupply of its products, and its stock price had gone into a steep slide--from its January 1992 high of $134.50 to $22.50. Anxiety over the possible effects of healthcare reform, as well as the maturation of the market for gall bladder instruments and a drop-off in popularity of other laparoscopic procedures, also helped to depress USSC's sales. The company's heavy investments in manufacturing capacity, which had caused it to go into debt, further damaged USSC's financial results, and the company embarked upon a plan to reduce expenditures.

In October 1993, USSC announced another quarter of losses and specified the cost-cutting procedures it would adopt. The company planned to lay off eight percent of its workforce (700 people), cut executive pay, and reduce its stock dividend. In an effort to reduce the oversupply of its products, USSC announced that it would shut down its factories for two weeks in the fall and then reopen them on a four-day work week. In December 1993, the company announced further cuts as its financial woes continued, and it took a $130 million charge against its earnings to pay for its restructuring. An additional 1,600 jobs were lopped off the payroll.

In February 1994, USSC began to seek investors to infuse badly needed cash into the company. This move came after USSC lost a suit it had brought against Ethicon for patent infringement, removing the possibility of a big cash settlement to strengthen its balance sheet. The balance sheet was, however, strengthened through a private stock offering that raised $200 million. USSC, in the face of the managed healthcare revolution, also began altering its sales tactics. Previously, it had sold its products directly to surgeons. But hospitals had developed purchasing groups through which they could demand large discounts. USSC started taking more of a partnership approach as it began dealing with such groups and other cost-conscious buyers. Meanwhile, Hirsch faced a more personal legal battle, a class-action suit alleging insider trading and excessive compensation in connection with his exercise of stock options prior to the spring 1993 stock plunge. It was eventually resolved through an undisclosed settlement.

By 1995 USSC had recovered enough to post respectable profits of $79.2 million on sales of $1.02 billion. The company, however, needed to find new sources of growth as its core stapling, laparoscopic, and suture products were no longer going to be the growth vehicles they once were because of continuing competition, particularly from Johnson & Johnson. USSC, therefore, began seeking acquisitions to expand its product line. In late 1995 the company spent $60 million for Surgical Dynamics Inc., a maker of spinal cages and other devices used in spinal surgery. In August 1996 came a $230 million hostile takeover bid for Circon Corp., a Santa Barbara, California-based maker of endoscopic and sterilization equipment for the urology and gynecology markets. This product line would fit in well with that of USSC, but Circon fiercely fought to stay independent in what developed into a protracted battle. By August 1997 USSC had gained a 14.9 percent stake in Circon, and in a proxy fight two months later decisively won two seats on Circon's board.

While Circon continued to stave off a complete takeover, USSC pursued other targets. In 1997 and 1998 the company made several acquisitions in the area of women's healthcare, including products used for minimally invasive breast biopsy. In early 1998 USSC acquired Pfizer Inc.'s Valleylab unit for about $425 million. Based in Boulder, Colorado, Valleylab was a maker of surgical ultrasound systems as well as electrosurgical devices used to cut and cauterize.

Late 1990s and Beyond: New Life As a Tyco Subsidiary

In the consolidating late 1990s, USSC itself became an acquisition target and the company agreed to be acquired by Tyco International Ltd., a Bermuda-based acquisitive conglomerate in May 1998. Tyco completed the acquisition in October of that year, through a deal valued at about $3.2 billion in stock. USSC thus became a subsidiary of Tyco and part of the Tyco Healthcare Group, which also included Kendall Healthcare, a maker of a wide range of disposable medical products. In anticipation of its takeover by Tyco, and in light of Tyco's professed antipathy to hostile deals, USSC terminated its tender offer for Circon in September 1998. As was typical, Tyco immediately began a cost-cutting program at USSC, including a workforce reduction of 775. Management changes also ensued. Hirsch, who had reached the age of 71, would no longer head the company he had founded 34 years earlier. Richard A. Gilleland, who was a former chairman and CEO of Kendall, was named to replace him.

Principal Subsidiaries: ARR, Inc.; ASE Continuing Education Center S.A. (France); ASE Partners S.A. (France); Auto Suture Austria GmbH (Austria); Auto Suture Belgium B.V.; Auto Suture Company, Australia; Auto Suture Company, Canada; Auto Suture Company, Netherlands; Auto Suture Company, U.K.; Auto Suture Do Brasil Ltda. (Brazil); Auto Suture Eastern Europe, Inc.; Auto Suture España, S.A. (Spain); Auto Suture Europe Holdings, Inc.; Auto Suture Europe S.A. (France); Auto Suture Europe Service Center, S.A. (France); Auto Suture France, S.A.; Auto Suture International, Inc.; Auto Suture Italia, S.p.A. (Italy); Auto Suture Japan, Inc.; Auto Suture Korea, Inc.; Auto Suture Norden Co.; Auto Suture Poland, sp. z. o. o.; Auto Suture Puerto Rico, Inc.; Auto Suture Russia, Inc.; Auto Suture (Schweiz) AG (Switzerland); Auto Suture Surgical Instruments (Russia); Medolas Gesellschaft fur Medizintechnik gmbH (Germany); Surgical Dynamics Europe, S.A.S. (France); Surgical Dynamics, Inc.; Surgical Dynamics Japan, Inc.; USSC AG (Switzerland); USSC (Deutschland) GmbH (Germany); USSC Financial Services, Inc.; USSC Medical GmbH (Germany); USSC Puerto Rico, Inc.

Principal Competitors: American Home Products Corporation; Baxter International Inc.; Bayer AG; Boston Scientific Corporation; Bristol-Myers Squibb Company; C.R. Bard, Inc.; Cardinal Health, Inc.; CONMED Corporation; Hoffmann-La Roche, Inc.; Johnson & Johnson; McKesson General Medical; Medline Industries, Inc.; Medtronic Sofamor Danek, Inc.; Novartis AG; Stryker Corporation; Teleflex Corporation; Utah Medical Products, Inc.; Vital Signs, Inc.

United States Surgical Corporation History

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Key Dates:

Company History:

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