Gerard Klauer Mattison
& Co.

212-885-4015
adirnagl@gkm.com

  Andreas Dirnagl
Senior Equity Analyst  

Interview conducted by:
Walter Banks , Co-Publisher

CEOCFOinterviews.com
March 2001 

Bio of Analyst

Andreas J. Dirnagl is a Senior Vice President and research analyst at Gerard Klauer Mattison. Before joining the firm in 1998, Mr. Dimagl was a vice president - investment banking in the Healthcare Group with Deutsche Morgan Grenfell. Prior to that, he worked in Eurobond underwriting in London with Deutsche Morgan Grenfell and as a client relationship manager with Deutsche Bank in New York. Mr. Dimagl earned an MBA from New York University and a BS in Business Administration from Georgetown University.

  About Gerard Klauer Mattison & Co.  

Gerard Klauer Mattison (GKM) is an equity research and investment banking firm, serving the institutional marketplace.  With over 20 senior, published analysts, the GKM Equity Research department covers more than 200 public companies, with a principal focus on the technology/telecommunications, media/entertainment, healthcare, energy and consumer industries.  GKM offers its investment banking clients the benefits of its award-winning research coverage, coupled with the depth of the firm's industry contacts and knowledge base.  GKM has raised over $4.7 billion in public offerings and private placements, and advised in over $3.0 billion of mergers and acquisitions, bankruptcies and leveraged buyouts.

Gerard Klauer Mattison Asset Management, comprising GKM Advisers, Inc., GKM Private Client Services, GKM Venture Partners, L.P., and Pattern Recognition Fund, L.P., has over $600 million in assets under management through its hedge funds and traditional money management services.

Founded in 1989, GKM remains privately held.  The firm is headquartered in New York City, with offices in Boston, Chicago, Los Angeles, San Francisco, and Tel Aviv.

CEOCFOinterviews - Mr. Dirnagl, please tell us the sectors that you cover?

Mr. Dirnagl:  "I cover the Healthcare Services space for the firm, which includes areas such as the acute care hospital sector as well as the renal dialysis sector; the assisted living sector and some selected medical technology."

CEOCFOinterviews – What trends are driving investors towards these spaces?

Mr. Dirnagl: "There are differing investment and thesis for the particular areas that we cover.  In general, healthcare services, particularly in the sort of markets that we’ve been seeing over the past couple of weeks and months are traditionally considered a very defensive non-cyclical sector.  They tend to be safe havens for investors in times of economic uncertainty, and economic recession, usually characterized by things such as falling interest rates, and rising inflation fears. Certainly some of the tech gloom and doom that we’ve been seeing over the past few months means that investors are shifting their money out of those sectors, and again are just looking for defensive non-cyclical areas.  Unfortunately, people will continue to get sick, no matter what the economy is like, and that continues to benefit companies such as hospital companies, and renal dialysis companies.  There is also the medical technology side, which is very similar, in that it is healthcare oriented. Perhaps not as much driven by some of the negative market sentiment, is the fact that there are many companies out there with innovative medical technology that have very good growth prospects going forward. This is based on general Healthcare trends, including things such as the aging of the US population.  The “baby boom” population is now beginning to hit their 50’s, and it’s traditionally in the 50’s and 60’s, where people tend to require a lot of medical intervention or a lot of their healthcare needs.  In fact, about 80% of a persons lifetime healthcare expenditures will be spent in the last few years of their lives. Moreover, these few broad trends are driving investors towards these spaces."

CEOCFOinterviews – Which of the companies that you cover would you describe as trendsetters.

Mr. Dirnagl: "We  have a couple, one of which is a Hospital Company under coverage called Universal Health Services (NYSE: UHS), which is one of our favorite picks in that space, and we are giving them a buy rating.  They focus on acute care hospitals, in what we call “tweener markets”, in which we normally divide hospital companies into urban/suburban providers or rural providers. Universal Health focuses on those in-between markets.  They are in places like Las Vegas, Nevada, in McAllen, Texas, and many of the border communities of Mexico down in Texas.  They are also in places like D.C., and Puerto Rico.  Those areas are characterized as having double the national population growth and a hospital company whose local facility usually has a dominant, number one position or a strong number two position. Universal Health Services is also making a number of acquisitions, which we think will help fuel growth in the future.

On the other side, a company that we like is CardioDynamics International Corp. (NASD: CDIC).  They are a company in the medical technology field, which we believe have a very innovative and new paradigm for hemodynamic monitoring, which is the monitoring of certain heart functions.  These are heart functions, which can’t be monitored without an extremely costly and very invasive procedure, which requires a couple of days hospital stay. Their main product is the “BioZ System”. This is a machine that performs a test to monitor the six main hemodynamic functions, using just more than a few sensors and electrodes to the body and can be done in about ten minutes at a much lower cost than the other option, which requires a lengthy hospital stay."

CEOCFOinterviews – Can you give us an evaluation of their management team?

Mr. Dirnagl: "I think that the company has an extremely strong management team., starting  with Michael Perry, their CEO.  Mike has been a successful person in the healthcare field.  He served as VP of operations for a company called Pyxis, which was a healthcare management information systems company. Prior to that, he was in various manufacturing and finance positions at Hewlett Packard’s medical products group, so he obviously has a lot of experience in this industry, particularly in taking what are innovative technologies and bringing them to the market. Mike is supported by a number of people, including Rhonda Pederson, who is the President of CardioDynamics.  She has 15 years of experience in the industry, and was President and CEO of a company called Culture Technology, Inc, which was a private Biotech company. Prior to that, she held a number of positions, including companies such as American Home Products, in their medical devices division and General Electric Medical Systems.  Finally, and probably worth mentioning is Dennis Hepp, who is the Chief Technology Officer of the company. He has almost thirty years of experience in cardio vascular medicine and the medical device industry.  He was previously with Medtronic, Inc. (NYSE: MDT), which is the industry leader in cardiac products, and he holds a degree in Electrical Engineering.  Therefore, they have a broad management team that is very experienced in medical devices and medical technology, and probably most importantly is experienced in bringing new medical devices and technology into the market."

CEOCFOinterviews – How long have you been covering CardioDynamics?

Mr. Dirnagl: "I’ve been covering CardioDynamics a little over a year now."

CEOCFOinterviews – What did you want to see them accomplish over the past year, and have they met those goals?

Mr. Dirnagl: "They’ve done exactly what they said they were going to do. The thrust of the company, and I think it is the most important aspect, which is; when bringing a new medical technology or new medical device to the field, the key to success from a financial point of view for a company trying to do that is, physician adoption. That means that the company has to educate the entire physician community, letting them know that there is a new option out there for the treatment of various patients, and in the case of CardioDynamics, anything that requires hemodynamic monitoring.  The core of the companies focus right now is in the congestive heart failure market, so they’ve been doing a very good job of getting out to such functions as the American Cardiology conferences, and getting the real thought leaders in the Cardiology field to stand behind their technology and to support what CardioDynamics is trying to do.  They are undertaking a number of clinical studies in which they are trying to show the efficacy of this product for various types of patients. I think where the company has done a very good job, is where they continue to look for ways to expand their potential market.  They currently focus on the congestive heart failure market, but over the past couple of months, they’ve been expanding that focus to include such things as the hypertension market, which potentially dwarfs the congestive heart failure market. They’ve recently announced a joint venture, alignment or agreement with the Heart Lung Associates of America, to focus on the use of the product with renal dialysis patients, which is another 300 thousand patient population in the United States.

From a financial point of view, the company has continued to grow sales at a pretty impressive rate.  Their most recent quarter showed 51% increase in revenues year over year.  There was quite honestly a bit of a disappointment from an earning point of view back in the 4^th quarter, just a few months ago. We were looking for a loss of 3 cents for the quarter, whereas the company posted a loss of 18 cents.  It really had a lot to do with the company investing in its future, specifically building up its sales and marketing in it’s clinical and support areas, looking through their list of customers. They along with a number of other companies had one customer in particular that was more of an Internet related play, and therefore decided that the most prudent thing to do would be to basically write off all of the inventory and accounts receivable associated with that customer. 

Finally, from a positive trend point of view, the company has what I believe is a very important relationship with GE Medical Systems, who is their partner in terms of distribution of the “BioZ System”. They have not only expanded that partnership in terms of its scope, i.e., into such places as Japan, but they’ve also expanded that partnership in terms of its scale. Most importantly, is an announcement and a recent introduction of their new product, the "BioZ ICG Module" which is designed to be used with GE Medical's "SolarT" monitoring system, and will be a module that will simply plug in to existing monitoring systems in hospitals, of which GE is the market leader. That, I think has a very large potential from the point of view, that floor space is basically a very high commodity within a hospital environment. The ability to be able to simply plug into an existing monitor system as opposed to having to have yet another box within the hospital environment, particularly in the ER section, could be very important and would most likely be a good driver of sales going forward. "

CEOCFOinterviews – What would you like to see CardioDynamics accomplish over the next 6 months to a year 

Mr. Dirnagl: "I think the biggest goal that I would be posting for them is one that they have accepted, and that is, reaching breakeven status, which we estimate is going to be sometime between the second and third quarter this year (2001).  The company has a good cash position, and has more than enough cash to see it through to that breakeven, but that’s obviously an important turning point for an early stage company.  Other than that, we want to see them very much continue what they’ve been doing now. We expect to see the benefits of some of these investments that they’ve made over the last couple of months, again particularly in their sales, marketing and clinical support areas, begin to bear fruit in terms of accelerating sales, not only of the actual product, which is the Bio-Z monitor, but also with their disposable sensors. It is sort of the old razor blade verses razor financial model, and the clinical support staff will go along way in terms of driving that disposable sensor income as well.  Finally, what is important with any early stage company such as CardioDynamics is the continued investment in research and development as we’ve highlighted before, particularly in terms of trying to find new areas of applicability for the product."

CEOCFOinterviews – What is your rating for CardioDynamics?

Mr. Dirnagl: "We rate them a buy. Overall, what I would want to say about CardioDynamics is that from my point of view, this is a typical early stage medical device company. It is probably even past early stage at this point, where the key really is adoption. What we have seen repeatedly within the Healthcare industry is that adoption is something that probably takes longer than what you expected it to take, but once it takes off it really becomes an accepted standard, and becomes broadly used among the industry.  There are many examples of this; in the past a company called Nellcor, which was acquired by Puritan-Bennett which was in turn acquired by Mallinckrodt, started off very similarly in terms of their technology, called pulse oximetry, which is the ability to read the oxygenation of the blood. They had a slow start and then the technology exploded in terms of its acceptance."

CEOCFOinterviews – Do you see that happening with CardioDynamics?

Mr. Dirnagl: "I do see that happening with CardioDynamics. Quite honestly, from an investment point of view, the question is when does that occur, and that is something that is very difficult to predict with any clarity. However, with the company positioning itself very well in terms reaching breakeven status, sometime mid this year, they continue to grow the company slowly until the point where they really can take off in terms of their acceptance."

CEOCFOinterviews – Is there another sector that you would like to mention in closing?

Mr. Dirnagl:  "I would like to leave you with yet another sector which we cover, and that is the renal dialysis sector.  A company that we like in that sector is a company called DeVita Inc. (NYSE: DVA), formally known as Total Renal Care. They are a renal dialysis provider; they own and operate dialysis clinics.  Dialysis is basically the substitution of artificial means for patients who have had kidney failure, i.e., it’s a way to filter the toxins out of the blood. The Dialysis Industry as a whole is a pretty good and stable business, with a 6 to 9% patient population growth, and very stable in terms of predictability of revenue and cash flow, from the point of view that patients have to come to you 3 times a week, or they die.  The company about two years ago at this point, faced a huge disappointment from the point of view that they made a major acquisition and their administrative and back office functions collapsed, causing cash flow to go negative and revenues to decline precipitously. A new management team was put in place at the company with Kent Thirty, as the Chairman and CEO. He has very good experience in the industry, and he has done an excellent job over the past 12 months, in turning that company around on an administrative basis, and now he is taking what we would consider a laser like intensity of his focus from the administrative side, now that its fixed, and placing it on the operations side. Theirs, is another story where we think the possibilities are very good, and that turning that company around, putting it back into an acquisition mode and really focusing on operations could provide a lot of upside from where we stand now."

CEOCFOinterviews – What is the rating that you’re giving DeVita Inc.?

Mr. Dirnagl: "We rate them a “buy” as well."       

CEOCFOinterviews – What final thoughts would you like to leave with investors?

Mr. Dirnagl: "In times of economic and market uncertainty, healthcare provides for an attractive investment given it's typically defensive and non-cyclical nature.  Traditional areas such as hospitals and dialysis providers can provide an attractive and highly visible earnings stream, which should provide for good stock appreciation.  Finally areas such as medical devices and technology, particularly early-stage companies can provide for dramatic upside as their products gain acceptance and increased usage in their respective fields."