Santa Ana Medical Supplier Suddenly a Wall Street Star : Stocks: Gish Biomedical pleases customers and gets a few breaks. Analysts are sitting up and taking notice.


Gish Biomedical Inc. of Santa Ana was something of a Wall Street wall flower until early this year, when company executives were deluged with calls from curious securities analysts.

The courting came fast and furious in response to several small events that put the company in the limelight: Craig-Hallum Inc., a securities brokerage in Minneapolis, published a glowing recommendation of Gish in January, and Business Week put Gish on its list of small "hot growth" companies.

"The reality is, we were discovered," said Jeanne M. Miller, Gish's vice president and chief financial officer.

The company's stock responded by soaring from $7.38 a share in January to $16.13 on June 13, just before splitting three-for-two. The stock closed Friday at $11, up $0.87 1/2 in light trading.

Gish is a small, 14-year-old, well-managed company that has prevailed in a tough industry--disposable surgical cardiovascular products--against much larger competitors by paying close attention to its customers' demands.

And Gish has the fundamental attributes that Wall Street likes: steady growth, good cash flow and low debt. In the last five years, Gish's revenue has grown steadily from $7.2 million to $18.3 million; net income has gone from $1,000 to $1.5 million.

In its first quarter of fiscal 1991 ended Sept. 30, sales were $5 million, up 29% from the previous year's $3.9 million, while net income for the quarter was $435,000, up from $246,738 for the same period a year ago.

Still, not everyone is sold on Gish. Jeff Kilpatrick, an analyst with Newport Securities, a Costa Mesa brokerage firm, said the company has done a good job of exploiting its market niche. But he said the company's potential is limited by heavy competition and the nonproprietary nature of its technology.

"To say it is among the top growth companies in the United States may be something of an overstatement," he said.

Still, the accolades keep coming. Last month, Forbes listed Gish as one of the "200 best small companies in America." The magazine said the company's five-year average return on equity was 12.3%.

Miller said the company's strong balance sheet has made it more attractive to investors and stock analysts who have been burned by their fascination with highly leveraged high-technology businesses over the last decade.

A major driving force behind Gish's growth--adding pizazz to its image among investors--is its role in combatting the AIDS epidemic.

Some of Gish's key products are designed to recover blood that otherwise would be lost by patients during and after open-heart surgery--a function that has gained importance as a way to reduce viral infection from AIDS and hepatitis that is contracted from donor blood transfusions.

Gish, located in a 44,000-square-foot building in Santa Ana, makes the tubing, filters and other parts of a system that suctions blood from a patient's chest cavity, cleans it and then puts oxygen in it before returning it to the body.

The company tailors such "packs" of blood-handling equipment to the design specifications of individual heart surgery teams. The packs are then labeled any way that is requested by the medical technician in charge of a patient's blood supply during surgery. One fan of Ohio State football, for instance, has his pack labeled "Buckeye."

In addition, Gish has introduced a number of new heart surgery products and has been diversifying into other surgical areas--including the labor and delivery and emergency rooms--to ensure continued growth of sales and profits.

Gish, which has 260 employees, has increased its market share despite competition from much larger and better financed players, such as Bentley Laboratories, a division of Baxter Corp., Shiley Inc., a subsidiary of Pfizer Corp., and Sarns Inc., a subsidiary of 3-M.

One reason is that Gish works hard to respond to the demands of the surgeons who are its principal customers, said Dr. Bradley Harlan, chief of cardio-thoracic surgery at Sutter Memorial Hospital in Sacramento.

Harlan said that during the 1970s, when he had an idea for a device for cooling the heart during surgery--thus reducing the risk of heart damage--he took it to Gish. Some of Gish's larger competitors, he said, either wanted him to sign over too many of his rights or were not interested, he said. But he was able to strike a deal with Gish.

Moreover, he said, the company made an important modification in the heart cooler that simplified it and increased its marketability. The product has been one of Gish's major sellers.

"I think they (Gish) are very responsive to changing needs," Harlan said. "So when an individual such as I comes to them and expresses an idea for a new product, they listen."

It is generally agreed that the person most responsible for Gish's success is Jack Brown, the company's 50-year-old president and chief executive. Larry Selwitz, health-care analyst at Cruttendon & Co., a Newport Beach securities firm, said Brown is "a good guy who put together a good organization that is highly regarded by distributors and by its clients."

Michael Henos, vice president and a principal of the Newport Beach office of 3I Ventures, a venture capital firm that invests heavily in the medical industry, likened Brown to a "pit bull" for his tenacity in building Gish despite difficult odds.

Brown is praised for having worked hard to develop personal relationships within the medical community. One result: About half of Gish's new products are suggested by surgeons, who receive royalties for their contribution.

Brown also is credited with rescuing Gish from early financial disaster. The company was founded in 1976 by Paul Gics (pronounced Gish), an entrepreneur who manufactured high quality products, Brown said, but underpriced them and spent extravagantly on corporate operations.

When Brown arrived as vice president of marketing in January, 1980, Gish was ending a year in which it lost $1.5 million on $1 million in sales. It also had accumulated about $500,000 in debt.

At the request of the company's board of directors, Gics resigned and Brown took on the job of chief executive with a mission to put the enterprise back on its feet.

Brown, who joined Gish after being Bentley's director of marketing and new product development, responded by raising prices and slashing overhead. He cut the staff to 28 from 55 and moved to less spacious quarters.

"It was a matter of survival," he recalled.

Brown said that when he took command of the company, he had to reassure customers that, contrary to what competitors said, Gish was not going bankrupt. "I did a lot of handholding and talked to all our customers personally," he said. "We didn't have many. So that wasn't difficult."

In May, 1982, Gish made its first public offering of stock and bonds to raise cash to satisfy numerous creditors who were demanding immediate payment.

The investment wasn't exactly attractive, Brown said.

"In polite legalese, the prospectus said this is a junk bond gamble," he said. "Do not buy the stock unless you have money to lose." Nonetheless, the offering raised $1.3 million.

The new funds also fueled Gish's efforts to develop a broader product line. Starting with one product--plastic tubing to support a blood oxygenation system during open heart surgery--Gish has expanded its line to 30 different medical products, each of which is offered in a variety of models.

Among the company's product successes was the development of a cylinder-shaped "reservoir" to hold and filter blood shed by patients recuperating from open heart surgery so the blood can be recycled back to their bodies.

Gish noticed that hospitals were increasingly concerned about spreading AIDS and other diseases through blood transfusions. So the company adapted a blood reservoir that had been routinely used during surgery so it also could be used in recovery rooms.

In moves to diversify into non-cardiology areas, Gish also has developed long-term implantable catheters used for intravenous feeding and chemotherapy and a different kind of catheter device for detecting and alleviating a high-risk condition during labor in which the umbilical cord may become squeezed shut, blocking off the infant's blood supply.

Not all of the company's moves have been winners. Brown confesses that after he got Gish into the ophthalmic or eye laser business in 1985, he made a series of management mistakes that stunted the operation's growth.

The experience taught him that a company such as Gish that is organized to sell disposable medical products does not have the expertise to market large pieces of capital equipment such as lasers.

Some analysts say one of Gish's weaknesses is that its success depends too much on Brown's experience, making it vulnerable if he were to leave. In response, Brown said that in the last two years he has been trying to increase the company's management depth.

But Brown admits that he has his fingerprints on every part of Gish and performs functions that would be shunned by most chief executives. "I've done everything from plumbing to (repairing) the roof," he said. He recalled that one Saturday several years ago when a hospital in Los Angeles ran out of heart surgery packs needed for emergencies, he delivered some personally. "That is customer service and with a company this size, that's what it takes," he said.

But being small also has the advantage of enabling Gish to respond more quickly to changes in customer demands than larger competitors, he added.

Brown said Gish's greatest challenge is to continue to develop new specialized surgical products at a brisk pace. Another goal, he said, is to expand the company's market share in Southern California where it is particularly soft.

Brown noted that Gish faces especially intense competition in its back yard because Orange County is also home for several other major cardiovascular companies, such as Bentley and Shiley.

Steven F. Crowley, the securities analyst who "discovered" Gish and wrote last January's report for Craig-Hallum, said Gish still has a lot of growth in its cards. He is not advising investors to buy Gish's stock at its current price, but believes the company is a good long-term investment.

"The tone of the news continues to be very good," Crowley said. "We continue to follow it (Gish) very closely because we see the operating momentum continuing and a better product mix developing."

AT THE HEART OF GISH BIOMEDICAL'S SUCCESS Although much smaller than its competitors, Gish has been successful as a maker of disposable cardiovascular products by tailor-making its equipment to the specifications of individual heart-surgery teams. The system shown below is used during open-heart surgery to circulate and provide fresh oxygen to the blood while the heart itself is stopped. Of the components shown, only the oxygenator is not made by Gish. Heart-Lung Bypass Circuit During open-heart surgery, the patient's body temperature is lowered and the heart itself stops beating. Circulation is maintained by pumping blood through special tubing to a device that mixes in oxygen. The blood is then filtered and returned to the body. Blood Recovery Reservoir A reservoir made by Gish collects blood that leaks into the patient's chest cavity during surgery. Recovering blood that was once lost helps to reduce the need for transfusions and the likelihood of infection from tainted blood. Oxygenator The oxygenator replaces the function of the lungs during surgery, mixing oxygen and venous blood in preparation for its return to the patient. Arterial Filter The filter removes tiny air bubbles and any undesirable particles that may be present in the blood before it is returned to the patient. Cooling Solution A special reservoir is used to chill a solution that is injected directly into the heart to lower its temperature. Cooling the heart reduces its need for oxygen and helps to prevent damage to the heart muscle while the heart is stopped during surgery. Source: Gish Biomedical Inc. NET INCOME (in thousands) 1986: $1 1987: $667 1988: $1,203 1989: $983 1990: $1,523 NET SALES (in thousands) 1986: $7.2 1987: $9.7 1988: $12.5 1989: $14.9 1990: $18.2 STOCK PERFORMANCE 11/24/89: $5.08 7/13/90: $16.25 11/23/90: $11.00

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