Makeover medicine

Shape up, sell off: David Burton is cutting costs and boosting sales to make the company attractive.

After 25 years of expansion at Compumedics, the company’s chief executive, chairman and founder, David Burton, is putting the medical devices maker up for sale. Whether by trade sale to a rival, an allied company, to the public in China or the United States, or to private equity, “we need to focus on shareholders return on investment,” Burton says. And Burton is hoping for a big cheque.

Burton started Compumedics in 1987 to develop and sell sleep disorder diagnostic machines. He listed the company on the Australian Securities Exchange in 2000.

Burton owns 60 per cent of Compumedics himself. Teijin Pharma, a Japanese healthcare company, is the next biggest shareholder with 5 per cent. The rest of the company is owned by a small, loyal clan of Burton’s backers and three or four holding companies. They have been very patient.

Selling is an option Burton has shunned to date but the company is now a sitting duck. Today, its stockmarket value is $13 million, even though in 2009-10 it sold $32.4 million worth of diagnostic equipment.

The question is whether Burton can simplify and sell the company’s story before shareholders lose their nerve and sell it off for whatever they can get.

Over the years, Compumedics has become complicated. It’s no longer just about sleep diagnostics. Using the $15 million from the float, Burton bought up the Texas-based electroencephalogram maker Neuroscan in 2002. Then, in 2004, it snapped up German blood flow probe maker DWL.

This gave Compumedics a suite of diagnostic machines in three growth areas of medical research and clinical treatment.

Then the company added a suite of products for measuring epilepsy symptoms and then made plans to list on an exchange in the United States: the Nasdaq or New York Stock Exchange.

Six months ago, that plan changed. The three- to five-year economic outlook in Australia and the United States and the high Australian dollar are major factors. “Our foreign exchange swung from US85¢ to $US1.05 in the space of a year. And 90 per cent of our business is export,” he says.

After a six-month review, Burton has come up with a new way forward. Compumedics has the money to keep going. It has little debt, a great brand with research and clinical centres worldwide and a profit – just.

And 80 per cent of equity is held by the top 20 shareholders.

Burton hopes to sell the company for as much as five times its revenue. His inspiration is the Vision Systems deal. The US corporation Danaher paid $800 million for Vision in 2006.

For years, the value of Vision Systems had hovered around $200 million. Vision had a complicated structure and was run by its founder, Jim Fox.

After getting advice, Fox sold a mismatched division (for $248 million, or nearly its entire market value). This sparked a bidding war and a stellar price.

For Burton, it’s time to tighten up costs and boost sales. In the past, the company has spent 15 per cent to 35 per cent of revenue on research and development.

In 2009-10, its new horizons research division spent $2 million.

In 2009-10, Compumedics net profit plunged 83.5 per cent to $451,000 on revenue of $32.4 million – a margin of just 1.4 per cent. Removing the new horizons division returned the bottom line margin to 8 per cent.

Burton plans to slash research and development to just 8 per cent of revenue in the next few years, making margins a much healthier 15 per cent. He has also moved about half of the manufacturing capacity to China and other parts of Asia.

It is also time to build up the sales force. The US market is growing, despite national economic doldrums. There are about 10 sales staff in the US, achieving sales of $US8 million in 2011. “We have only about 30 per cent to 40 per cent of our target market there,” he says.

Burton says he will double the size of the US sales team in the next two years to build sales there to $15.5 million. The company has a record of being successful in 65 per cent of sales bids. He thinks he can build sales in Germany quickly, too.

“Our competitors have had six people bidding against us in just one of our divisions”, he says.

“I have appointed recruiters now to find us the best sales managers and sales force.”

The new horizons research division will be sold, along with any intellectual property that doesn’t fit the core business divisions, which are sleep (40 per cent of revenue), EEG (25 per cent) and ultrasonic blood flow (15 per cent, with the remaining revenue from maintenance and service.)

Burton is not waiting to reach his goals before talking to buyers. In May, he met “half a dozen” specialist health brokers in New York.

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