A Healthy Rx for Maker of Drug-Dispensing Equipment : Health care: Pyxis Corp. has built a $40-million business in a market it created single-handedly.

With gloom pervading the economy, making a buck would seem an impossible task for any business anywhere these days.

But Pyxis Corp. of San Diego, a 5-year-old manufacturer of computerized drug-dispensing machines for hospitals, has shown how wrong that assumption can be. Not only has Pyxis grown quickly and profitably in a down economy, the medical equipment manufacturer has virtually created a market, one that it completely dominates. So far, at least.

In the two years since Pyxis began selling its products, its sales have gone from $300,000 in 1990 to $13.4 million in 1991 to a projected $40 million for the current fiscal year ending December. Employees now total 200, up from 65 a year ago. Profits for the first three quarters of 1992 were $7.1 million, up from break-even last year.

That kind of performance was bound to attract investors--and it has. Pyxis shares, which began trading at $14 per share after its initial public stock offering in July, since have zoomed to Monday’s closing price of $30.125 in over-the-counter trading.

The key to Pyxis’ success is that its products address hospitals’ growing need to cut costs and improve efficiency. Specifically, Pyxis’ systems save hospitals time, money and thefts related to the dispensing of drugs to patients.

The key to Pyxis’ success has been its Med Station, a 4-foot-high metal box with automated drawers that dispense drugs according to nurses’ commands punched into keyboards similar to those of automated teller machines. The machines feed billing data into hospitals’ computerized accounting systems via electronic cables, as well as create paper records of drugs dispensed.

Under the old method, doctors’ prescriptions for hospital patients were filled by sending messengers to pharmacies or by taking drugs from cassettes doled out by pharmacists to specific floors. In either case, nurses were the ones who were ultimately responsible not only for administering the medicines but for keeping track of the drugs in inventory, something most health care workers find a drudgery.

By dispensing drugs and leaving an electronic record, the system saves time, labor and paperwork, said health care administrator Dennis Moran, an associate director of hospitals and clinics at UC San Diego Medical Center, where 18 Pyxis units are in operation.

The key to the value of the Pyxis system, Moran said, is that it “shortens time needed in getting drugs to the hospital floors where the patients are, which equates to staff time of technicians and messengers and, therefore, to cost-effectiveness.”

Byron Schweigert, vice president of pharmacy services at Long Beach Memorial Medical Center, which has installed 24 of the Pyxis units since early 1990, said his hospital has seen “dramatic improvement in the accuracy of its record keeping of controlled substances. . . . It’s always been an area of potential theft or diversion, and having these machines and having the printed record makes it easy to see who and what was there.”

Pyxis chief executive Ron Taylor says the product is so simple and efficient that a common reaction among hospital administrators when they are shown the product is to exclaim: “Why didn’t I think of that!”

The man who actually thought of the Pyxis concept is a Los Angeles doctor named John McLaughlin. In 1987, he approached Biovest Partners, a San Diego venture capital firm, and sold one of the firm’s two principals, Tim Wollaeger, on the idea of developing a computerized drug-dispensing machine to eliminate waste in the health care system.

Biovest was the enormously successful venture capital firm started up in 1986 by Wollaeger and Howard E. (Ted) Greene. Both are former Hybritech executives whose $5 million in initial venture funds financed the start-up of six companies. Biovest has since dissolved, but three of its six start-ups--Pyxis, Amylin and Cytel--have gone public and have current combined stock market values of $800 million.

Greene is Pyxis board chairman and Wollaeger is now a board director.

The timing of McLaughlin’s approach to Wollaeger was propitious because Wollaeger’s former associate, Taylor, had recently resigned his job as Hybritech’s vice president of operations. Wollaeger gave Taylor the job of Pyxis chief executive, giving the new company the benefit of Taylor’s role in helping build Hybritech into the first commercially successful biotechnology company.

Through ex-executives who have gone to manage other companies, Hybritech has spawned 18 successful San Diego-based biotechnology and medical product companies, including Pyxis, Wollaeger said.

With $12 million in venture capital at its disposal, Pyxis slowly developed a product that by early 1990 was ready for commercial installation. The Pyxis Med Station has been an enormous success, with installations growing from 22 hospitals at the end of 1990 to 100 at the end of 1991 to the 300 using them now.

“I’ve been optimistic all along that (Pyxis) was a great idea, and I think our success has proven me to be right, despite skepticism of a lot of people in the industry,” Wollaeger said. Both Wollaeger and Greene are former Baxter International executives who have spent their careers in the biomedical industry.

Pyxis machines could reach 1,000 hospitals by 1995, according to Stephen Buermann, a securities analyst with Merrill Lynch, the co-underwriter of Pyxis’ initial public stock offering. Despite the prospect of growing competition, Buermann said Pyxis market position should remain strong “because they were first.”

“Whoever is first usually gets the majority of the market because others are playing catch-up,” Buermann said.

“When hospitals install a system that works well and which nurses become familiar with, they would prefer to stay rather than change unless you can be shown major advantages in a new system worth the retraining.”

A key element in Pyxis success, Wollaeger said, was its ability to line up $40 million in lease financing from General Electric Credit Corp. That enabled Pyxis to rent the machines to hospitals, generally a more palatable financing alternative to outright purchase given the novelty of Pyxis technology and the financial pressures most hospitals face.

Another helpful factor, Taylor said, was Pyxis’ decision to establish a direct sales and service staff of nearly 90 employees across the country, enough to provide customer hospitals with the “hand holding” they would need to become comfortable with the machines.

The product Pyxis sells is manufactured entirely in San Diego at the company’s 47,000-square-foot plant in Carroll Canyon.

“We created the company right here, did the engineering locally and are completely self-sufficient. We didn’t even have to go to Japan to make the machines,” Taylor said with a touch of irony.

“The entire infrastructure to run a successful business is available here,” Taylor said. “People are looking for minute savings by going out of the country when what they should be focusing on is their market.”