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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
Healthcare
Medical Equipment & Supplies
(ALSC: NASDAQ)
Bio-Logic Systems Corp.
One Bio-Logic Plaza
Mundelein, IL 60060
Phone: 847-949-5200
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: ABaerÒ,
CUB (ABR and OAE), AuDX® (OAE), Navigator® Pro, Scout® Sport, M×A×S×T×E×RÔ,
Stacked ABRÔ, Ceegraph™, Ceegraph Traveler®, Universal Reader™,
Sleepscan™, VISIONÔ, Airflow Pressure Transducer, Tree TipÒ, Ear MuffinÔ, 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 AtlasÒ, 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 M×A×S×T×E×R?
Mr. Johnson:
“M×A×S×T×E×R 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. M×A×S×T×E×R, 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 M×A×S×T×E×R. 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 M×A×S×T×E×R, 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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