Bio-Logic Systems Corp. (ALSC)
Interview with:
Roderick G. Johnson, President and COO
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
computerized electro-diagnostic systems for hearing, neurology and sleep, used in hospitals, clinics and physicians’ offices.

 

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Bio-Logic Systems has distinct advantages in hearing and screening diagnostics and neurology and sleep diagnostics due to their software and hardware technology and exclusives in some product lines

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Healthcare
Medical Equipment & Supplies
(ALSC: NASDAQ)

Bio-Logic Systems Corp.

One Bio-Logic Plaza
Mundelein, IL 60060
Phone: 847-949-5200


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Roderick G. Johnson and Gabriel Raviv, Chairman & CEO


Roderick G. Johnson
President and
Chief Operating Officer

Interview Conducted By:
Diane Reynolds
Associate Publisher

CEOCFOinterviews.com
October 2004

BIO:
Roderick G. Johnson joined the Company in September 1999 as President, Chief Operating Officer and a member of the Board of Directors. He founded the NeuroCare Group in 1994 and served as Chairman, President and Chief Executive Officer until 1999. From 1992 through 1994, Mr. Johnson served as Chief Executive Officer in Residence at Weiss, Peck & Greer and the Continental Illinois Venture Corporation. In addition, from 1988 through 1991, Mr. Johnson was President and Chief Executive Officer of Domino Amjet, Inc.

Company Profile:
Bio-logic Systems Corp. is a leader in the design, development and marketing of computerized electro-diagnostic systems used in hospitals, clinics and physicians’ offices. Its core businesses are in hearing, neurology and sleep. Bio-logic has been a leader in the hearing assessment market since the Company’s inception in 1979, offering integrated solutions for hearing screening and diagnostics incorporating the latest technologies. The company also offers a wide range of systems and disposables for screening and diagnosis of sleep disorders, as well as a broad range of computerized systems used by neurologists, epileptologists, EEG technologists, neurosurgeons and other professionals to record and analyze electrical activity in the brain (EEG) for use in the diagnosis and management of intractable seizure disorders.

Each area has its own market potential:
Hearing assessment: Automated hearing screening in newborns, aimed at early detection of hearing loss, is one of the fastest growing hearing markets. Of the 4 million births in the U.S. each year, approximately 3 of every 1,000 infants are born hearing impaired. This focus on early intervention has generated a growing need for improved diagnostic equipment that can quickly and accurately identify and assess the baby’s hearing loss.

Sleep disorders: There are a wide range of sleep disorders including sleep apnea, narcolepsy, insomnia, pediatric disorders and many others. These disorders affect the quality of life, pose a threat to public safety on the road and at work, and can be fatal. The sleep diagnostic market is estimated to be $80 million.

Electrical activity in the brain (EEG): Long-term monitoring is used to diagnose disease, monitor the efficacy of medications and obtain information critical for surgical treatment when indicated. The market is in transition from analog to digital video technology. Digital video systems save both EEG and video records in digital form, replacing paper and videotapes.

Product Offerings: ABaer, CUB (ABR and OAE), AuDX (OAE), Navigator Pro, Scout Sport, MASTER, Stacked ABR, Ceegraph™, Ceegraph Traveler, Universal Reader™, Sleepscan™, VISION, Airflow Pressure Transducer, Tree Tip, Ear Muffin, HALO Ear Muffin


CEOCFOinterviews: Mr. Johnson, please give our readers a brief background on the company.

Mr. Johnson: “Bio-Logic is celebrating its 25th year; it was founded in 1979 by the chairman and two other founders. The total focus of Bio-Logic is in computerized electro-diagnostic equipment. The areas of diagnostics we are in are neurology, sleep apnea monitoring, and hearing screening and diagnostics, which has become our largest market. The company went public in 1983 and is listed on the NASDAQ. We have about 120 employees and finished our fiscal 2004 year with $28 million in sales, $13 million in cash and no debt.”

CEOCFOinterviews: Please tell us about the main product that started this company.

Mr. Johnson: “The first product was designed by Gabe Raviv, our chairman, when he was at Northwestern working on his PhD. It was introduced when computers first started coming out and was a product designed to monitor auditory brain stem response using a PC. As the company grew and went public, it became focused on different areas of neurology and one of the popular products at that time, during the 80’s, was called the Brain Atlas, which we no longer sell. During the 1990s, we developed the sleep apnea monitoring system and continued to enhance the sophistication of our neurology products. Up until the last few years, neurology had been the largest part of our business, but has now been overtaken by hearing screening and diagnostics.”

CEOCFOinterviews: What are the benefits of MASTER?

Mr. Johnson: “MASTER is something totally new. We have to back up a bit in order to better understand what has been happening in infant hearing screening.

CEOCFOinterviews: What has been happening in infant hearing screening?

Mr. Johnson: “Currently, about 35 states screen infants before they leave the hospital, and with 4 million births annually throughout the U.S. it is estimated that about 90% of those infants are screened for hearing before they leave the hospital with equipment like our handheld AuDX screeners. In the past, if the infant was referred for further testing, the problem was that the audiologist did not have a fast, efficient way to assess the infant’s hearing thresholds. You can’t just put headphones on an infant and expect them to respond like you would if they were school age. MASTER, which was developed in cooperation with researchers at the Rotman Research Institute of Baycrest Centre in Toronto and licensed exclusively to us, is a multiple frequency technology for auditory response which within 20-30 minutes gives the audiologist the threshold of hearing that they will use to determine whether everything is okay or the infant should be referred to a physician for therapy. That product is very important to the growth of the company as we look forward into the next couple of years.”

CEOCFOinterviews: There has been a lot of talk on the news and there are lots of products out there for sleep apnea. How is this area taking off for you?

Mr. Johnson: “There is a lot of press about sleep apnea monitoring; it has been linked to cardiovascular disease and currently there is a backlog of potential patients to get this test done. It’s an overnight test with a sleep technologist and the physician reviews the scoring of the evening’s sleep and decides whether or not the patient has sleep apnea or any other condition. We’ve been in this market for over 10 years. The difference is we are not a therapeutic company. We don’t have the products that go along with sleep apnea therapy, so while I wouldn’t say it’s a struggle, it’s a very competitive market where other companies offer products in addition to diagnostics. We feel our product is very competitive and extremely well accepted. We have some great accounts, some with upwards of 50 units in their different sleep labs, but we are not the market share leader in this area.”

CEOCFOinterviews: Tell us about the HALO Ear Muffin.

Mr. Johnson: “The HALO Ear Muffin is an invention that is the next generation of our original Ear Muffin and is used on all of our products that require that type of coupler. It can be used with our Navigator Pro and can also be used with a competitor’s product as a direct replacement for their coupler. It’s an over-the-ear plastic enclosure that captures the sound that goes into the baby’s ear. This is a patent pending product that is better and cheaper than our competitor’s, and we are launching it into a $20 million market. This product has great potential for us in the next two or three years.”

CEOCFOinterviews: Where is the majority of the manufacturing being done now for all of your products?

Mr. Johnson: “We assemble and test all of our products in the Chicago, Illinois area.”

CEOCFOinterviews: How much of your revenues are coming from the international market?

Mr. Johnson: “In fiscal 2004, $5 million was from international customers in approximately 60 countries.”

CEOCFOinterviews: With all of the turmoil in the international arena lately, has this affected your company in any way?

Mr. Johnson: “If you are talking about economic turmoil, we haven’t seen the reaction that you are referring to. It may be there, but we haven’t been affected.”

CEOCFOinterviews: Are your products sold to the clients on a lease basis?

Mr. Johnson: “Our products sell for prices ranging from $3,500 to $50,000 or more, depending upon the equipment and software purchased. Occasionally we will arrange for a leasing company to work with a sleep diagnostic clinic, but leasing is not a significant part of our business. As far as the follow on revenue, we see more of that in the hearing business. Screening the babies, the consumables that go with it can range from $1.00 to $7.50 per screen. That has become a much more important overall business segment in the last two to three years.”

CEOCFOinterviews: Once you sell the equipment to your clients, how much follow up on training is done to educate them on the use of the equipment and software?

Mr. Johnson: “It depends on the area. For example, in neurology we use our own professionals to install the products. These are registered sleep or EEG technicians who work for us, and they do both the installation and training. That is the basic level training and we also offer advanced courses in sleep apnea at our headquarters, as well as at universities and other sites. In the hearing area, there has been a major emphasis in the last two years on education in the new technologies such as MASTER. That involved holding over 20 seminars throughout the country, as well as some overseas. Looking forward, education will continue to be very important to us. We will be working in partnership with a select group of universities to further the education of audiologists who have already graduated, and to keep the universities on the cutting edge of the new products and technologies that we are coming out with. That program is called the Audiology Centers For Excellence (A-C-E). We are having our kick-off meeting with the first five of these universities in the next couple of weeks. They are very excited about this program and we are too. We place a strong emphasis on training both audiologists, and specialists in neurology and sleep, to use our systems.”

CEOCFOinterviews: With technology changing it is crucial for doctors and hospitals to continue to become educated.

Mr. Johnson: “It is critically important, and even though the software gets easier and easier to use, you have to know what is in there. There is so much in there that it takes a lot of training on all of the features to use the products to their best advantage. It’s overwhelming sometimes. We are committed to education. Hopefully in electro-diagnostics, we are going to be known as the education company.”

CEOCFOinterviews: Are upgrades important to your business plan?

Mr. Johnson: “Upgrades are an important part of our business. It’s not only upgrades on the computer technology end where advances occur so rapidly, we also have service agreements where at the end of three years we will replace all of your computers and include the latest software. What’s great about the hardware we produce, the example I’m going to give is in neurology and sleep, is that the headbox that interfaces between the person and the computer does not have to be changed, so there is a major cost savings for the hospital. It also helps them keep up-to-date with all of the changes, unless during that three-year period they get a software upgrade that includes our new features. On the hearing side, many accounts like to update their Navigator Pro systems with additional software that they were unable to budget for in the initial purchase. They already have the hardware, they just need the software to update their Navigator Pro. It is very important for us to keep in contact with our customer base to ensure that they have the latest technologies available.”

CEOCFOinterviews: How much do you spend in R&D annually?

Mr. Johnson: “As a percentage of sales, it is in some years almost 20%.  It’s a very major commitment the company makes to stay competitive and maintain our position as an industry technology leader.”

CEOCFOinterviews: How about inventory?

Mr. Johnson: “It has been coming down and in fact probably came down a bit too much last year, so I expect us to increase inventories somewhat this year. We’ve been on a downward trend during the last four years, but expect inventory to basically remain close to current levels.”

CEOCFOinterviews: As far as the numbers for the last quarter, are you comfortable with them?

Mr. Johnson: “Comfortable? No one is ever comfortable unless they blew the top off. Not really. Hearing had a strong quarter, particularly in the U.S., but neurology had a slow start. I’m hopeful that by the six-month mark the neurology area will pick things up a bit. International had its first quarter in some time where they were a little slower than usual, but I think that had more to do with timing due to a strong finish in the fiscal 2004 fourth quarter.”

CEOCFOinterviews: The other product we didn’t mention was the Stacked ABR.

Mr. Johnson: “Stacked ABR is a technology that is also licensed exclusively to Bio-Logic to identify very small abnormalities in the auditory nerve. This helps the ENT and audiologist to screen certain patients before sending them to therapy. We licensed this technology from Healthcare Institute in California and adapted it to our Navigator Pro system. It takes a lot more training and education for the center, the ENT office or hospital with the audiologist. There is still a lot of interest in this product. The benefit is that the physician can use it with the audiologist to screen patients for these very small abnormalities that can be on or around the auditory nerve. By using Stacked ABR they can eliminate the need, in some cases, for sending patients for a costly MRI. That’s of course very beneficial and there has been at least one article written on it. So that product, although it is not growing as fast as  MASTER, is still an important part of our technologies.”

CEOCFOinterviews: What do you feel has been the biggest hurdle for the company?

Mr. Johnson: “It’s always been to achieve consistent growth. Technologies have different rates of acceptance and R&D yields more significant results at different times. Even though we spend a significant portion of our revenue dollar on R&D, it’s always a challenge to get the products out as fast as we can. We think we are one of the fastest at doing this, but sometimes the acceptance doesn’t match up with the quarterly reporting we do as a public company. One of our biggest challenges is to put together a string of consistent growth.”

CEOCFOinterviews: In all of the areas that you cover, is the competition fierce in one area over the other?

Mr. Johnson: “I don’t know anyone who doesn’t have fierce competition, but the degree we face depends on the product line. With hearing and diagnostics, and our exclusive products, there is competition, but we believe that we are the market leader. In infant hearing screening, it has gotten more competitive in the last 2-3 years. In the consumables area, it is competitive with a couple of other companies. Neurology is very competitive, there are about 10 companies we are dealing with in that field. It’s the same with sleep diagnostics, where it went from least to most competitive.”

CEOCFOinterviews: I think a lot of this is due to public awareness.

Mr. Johnson: “I think public awareness has helped a lot in sleep apnea monitoring. You see a lot in the local newspapers on concerns about sleep and the obesity of Americans. These problems aren’t going away overnight, so people should have these tests done to improve their health.”

CEOCFOinterviews: In closing, what do you feel a potential investor, just getting acquainted with your company, should be looking at?

Mr. Johnson: “First of all, the history of the company; in business for 25 years, no debt, $13 million dollars in the bank and consistent profitable growth, though not necessarily quarter by quarter. Bio-Logic Systems is in an area where we typically have distinct advantages due to the software and hardware technology that we offer, and we have exclusives in some of our product lines which is very important. We have considerable experience in electro-diagnostics across the board in both hearing and screening diagnostics and neurology and sleep diagnostics. At least two out of three of those areas are growing at a pretty decent rate, and we definitely have more growth potential and a high quality balance sheet that investors are buying into.”

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“Bio-Logic Systems is in an area where we typically have distinct advantages due to the software and hardware technology that we offer, and we have exclusives in some of our product lines which is very important. We have considerable experience in electro-diagnostics across the board in both hearing and screening diagnostics and neurology and sleep diagnostics. At least two out of three of those areas are growing at a pretty decent rate, and we definitely have more growth potential and a high quality balance sheet that investors are buying into.” - Roderick G. Johnson

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