Pacemaker Firm Takes Competition to Heart : Health: Sylmar's Siemens-Pacesetter has undergone enormous growth to become the industry's No. 2 company.


In mid-August, Siemens-Pacesetter Inc., a Sylmar manufacturer of heart pacemakers, got federal approval to start selling its latest pacemaker, the Synchrony.

The device, which costs doctors $6,300, is the most sophisticated and expensive pacemaker Siemens-Pacesetter has yet designed. Chairman Alfred E. Mann believes that Synchrony will enable his company, the industry's No. 2 player with about 25% of the $1.2 billion in annual worldwide pacemaker sales, to grab an additional 4% to 5% of the market.

A big jump on the competition? Hardly. Before you could say cardiovascular system, Medtronic Inc., the industry leader with about a 43% market share, also got federal approval to start selling its Synergist II pacemaker, which competes head-on with Synchrony.

Nonetheless, Siemens-Pacesetter's ability to bring new products to market in tandem with Medtronic reflects its rapid growth over the past decade. A unit of the West German conglomerate Siemens AG, Siemens-Pacesetter expects to post sales of $250 million for its fiscal year ended Sept. 30, compared to $10.8 million in 1979, Mann said.

Siemens-Pacesetter has fought to overcome the effects of a 1983 scandal in which the company, a former president and two other executives--but not Mann--pleaded guilty or no contest to federal charges of paying kickbacks totaling up to $140,000 to doctors who used Pacesetter's pacemakers. The company and the executives were fined between $2,000 and $40,000 each.

Since that low point, Siemens-Pacesetter has continued growing from an also-ran to second place in the industry, and its rising stature now forces Medtronic--and the half-dozen or so smaller pacemaker companies--to stay on their toes.

"Everybody views Siemens-Pacesetter as the competition," said Bernard F. McDonagh, who follows the industry for the investment firm Piper Jaffray & Hopwood in Minneapolis. "You've got Siemens behind them with deep pockets and a long-term commitment."

Case in point: Siemens, with $30 billion in annual sales, gave Siemens-Pacesetter the go-ahead to build a $30-million, 208,000-square-foot plant about a mile from its current headquarters.

Mann said "our ambition is to catch up with Medtronic" in leading the industry, but he acknowledged that "we have a ways to go." Indeed, although Medtronic's sales--which totaled $742 million in the year ended April 30--have slowed from their double-digit growth rate of the mid-1980s, they are still growing.

Carol D. Winslow, an analyst with the brokerage firm Dain Bosworth Inc. in Minneapolis, where Medtronic is based, said that while Siemens-Pacesetter has taken some business away from Medtronic, it is mostly snaring market share from smaller competitors.

Siemens-Pacesetter is "probably hurting Medtronic, but they are not eating Medtronic's lunch by any means," Winslow said.

About 100,000 Americans will get pacemakers this year; another 18,000 of the 500,000 who already have them will need replacements. The devices cost doctors between $2,000 and $6,500, Mann said. The cost to patients, after the doctor and hospital have added their fees, is substantially higher.

Pacemakers help the heart maintain a steady beat by electrically sending pulses to the heart. Normally, a part of the heart called the sinus node conducts the heart's rhythm, slowing it down or speeding it up to match blood flow--and thus oxygen needs--to match a person's activity. But when the sinus node's ability to pace the heart fails, a pacemaker is often needed.

Early pacemakers (the first one was implanted in a human in 1958) simply kept the heart at a constant rate of 70-75 beats per minute, regardless of whether the patient was running or sleeping. They also were "single-chamber" devices, meaning that their pulses were sent only to the lower half of the heart, where the main pumping activity occurs.

About 75% of pacemakers sold today remain single-chamber devices. But the new versions can adapt the pacemaker's rate to the patient's activity level. Many do so with sensors that pick up the body's muscle activity.

The other 25% of pacemakers are "dual-chambered" products, which send pulses to both the upper and lower chambers of the heart for patients that need such help. And the Cadillacs of the business are the dual-chambered, activity-responsive pacemakers such as Synchrony and Synergist II. After they are implanted, doctors use a tabletop computer to program the pacemakers, thus synchronizing the upper and lower chambers of the heart.

Mann, 63, started the company as Pacesetter Inc. in 1969 with Johns Hopkins University, whose Applied Physics Laboratory was searching for ways to improve the longevity of pacemakers. After more than a decade of development, pacemakers then lasted only about 18 months before they had to be replaced. Today, they typically last between five and 20 years, depending on the model and the patient's needs.

A Portland, Ore., native, Mann already was running two Los Angeles companies that he had founded--Spectrolab and Heliotek, which made power systems for spacecraft--when he started Pacesetter. He earlier had sold the first two companies to Textron, with his share of the proceeds totaling $10 million, but continued managing them until he turned his full attention to Pacesetter in 1972.

In 1983 came the kickback scandal. Mann said most of the charges related to a program in which Pacesetter gave doctors discounts on Pacesetter pacemakers if they used the devices to replace patients' current pacemakers, even if they were rival brands. Mann said he approved the program, and "we still don't think it was unethical, but it's technically a violation of the Medicare statutes."

Other charges involved some of the Pacesetter executives allegedly paying doctors in advance for clinical evaluations of their products. Mann said he was not involved in those incidents, which "were totally contrary to my directives."

Brian M. Mann, Mann's son and Siemens-Pacesetter's current chief operating officer, said the kickback case "had a negative effect, but not a major effect," on the company's sales growth. But he said it was not the reason that Siemens, which had unsuccessfully made several attempts to invade the U.S. pacemaker market itself, bought its way in by purchasing Pacesetter in 1985.

Alfred Mann declined to disclose the purchase price, but sources said it was between $100 million and $200 million, with just under half going to Mann for his stake in the company.

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