Disastrous Deal
At the time, the transaction seemed like the ideal way for Gish Biomedical Inc. to tap into a fast-growing market.
In 1995, the Irvine manufacturer of medical devices paid $2.6 million to purchase a line of infusion pumps from a small company, gaining a chance to diversify into the promising market for pumps that supply pain medication and other therapies to patients in their homes.
But the deal has turned out to be a major headache. Months after the purchase, Gish had to fix a software problem after a patient received an overdose of morphine.
Though that overdose proved harmless, an overhauled pump delivered a fatal dose of morphine last year to an end-stage cancer patient, said Jeanne Miller, the company’s chief financial officer.
The debacle created losses and left the company floundering in a business it would now rather not be in. Gish recalled the device and halted all infusion-pump sales in the fiscal year ended June 30, according to a report filed this week with the Securities and Exchange Commission.
“If we had to do it over again, we probably wouldn’t be in the infusion-pump business,” Miller said.
The pump originally was made by Creative Medical Development Inc. of Nevada City, Calif.. But Creative needed money, and Gish bought the pump technology and related assets.
Unlike some competing single- or double-purpose devices, Creative’s EZ Flow pump had four uses, including providing pain medication.
Miller said about 700 of the devices were sold, including 200 by Gish after the acquisition. The pump, which cost $1,800 to $2,300, resembles a minicomputer and weighs about half a pound. It was either dangled from a patient’s IV pole or kept in a fanny pack at the patient’s waist.
Shortly after the acquisition, Miller said, the device developed minor problems, such as a sticky keypad. When a software glitch led to the first overdose, in August 1996, the company recalled the product, promising to fix the software.
No sooner had Gish completed that recall than a reworked device dealt a fatal dose to a woman dying of cancer in September 1997. The patient’s family decided against having an antidote administered to revive her and didn’t sue the company, said Miller.
But that incident prompted the company to recall the device completely, scrap the design, cancel sales and start over.
Creative Medical’s founders couldn’t be reached for comment. The company--a publicly traded shell--merged last year with OMNI International Rail Products Inc., a private maker of railroad- crossing products. The public company, still named Creative Medical, is now based in Portland, Ore..
Creative Medical’s chief financial officer, M. Charles Van Rossen, who joined the company after the sale of the infusion-pump line, said he was unaware of Gish’s problems with the products.
For the three years ended June 30, Gish lost $4.7 million on the pump and related items, including write-offs of inventory and tooling. The company spent about $1.8 million in sales, marketing, inventory and other expenses associated with the pump products, Miller said.
What’s more, she said, it’s now paying $200,000 a year for software engineers hired to design a new pump from scratch.
In the last three years, Gish stock has lost 73% of its value. The stock, which closed at $9.25 a share on Oct. 17, 1995, closed Friday at $2.50 a share, off 12 cents.
Although the company would have preferred to drop the project completely, Miller said, it feels an obligation to customers to deliver a product that works as the original was billed.
Overall, Miller said, the pump was “a minor portion of our business from a revenue standpoint” but “a major contributor to our weak profit performance.”
For the last fiscal year, the company posted a loss of $2 million, or 59 cents a share, compared with a loss of $1.9 million, or 57 cents a share, for the previous year. Sales were off 4%, to $20.3 million from $21.1 million.
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Taking a Hit
Gish Biomedical’s purchase of a medical infusion pump company in 1995 turned into an expensive setback, helping depress earnings. Quarterly sales and net income in millions:
Sales
4th Quarter 1998: $5.25
Net Income
4th Quarter 1998: $-1.57
Source: Bloomberg News
