BB&T Executive Editor

Paralleling — and perhaps shadowing — the economic downturn in the U.S., several medical technology companies reported restructuring efforts in March.

Restructuring of operations by Alkermes (Cambridge, Massachusetts) came following the decision by Eli Lilly and Company (Indianapolis) to terminate its AIR Insulin program, an inhaled insulin development effort, and the third such program recently abandoned. And Inverness Medical Innovations (Waltham, Massachusetts) also is restructuring, this coming in the wake of its aggressive acquisition program over the past several months.

Alkermes, the developer of the inhaler delivery device for Lilly's AIR insulin product, said it is reducing its workforce by about 150 employees — about 18% of its total — and closing its AIR manufacturing facility in Chelsea, Massachusetts.

Lilly's withdrawal from the AIR insulin effort follows the decision by Pfizer (New York) late last year to abandon its inhaled insulin product, Exubera, being developed with Nektar Therapeutics (San Carlos, California); and then the move by Novo-Nordisk (Bagsvaerd, Denmak) in January to end its partnership with Aradigm (Hayward, California) for the development of AERx iDMS.

The three decisions underline the significant difficulties of the inhaled insulin effort: large developmental costs and low expected payback. Exubera, the only such product to win FDA approval, had captured a miniscule 1% of the insulin market.

David Broecker, president/CEO of Alkermes, said that a new operational cost structure will "align our expenses with near-term revenues," which he put at lower than previously predicted. He added: "Alkermes' financial foundation remains strong, and we are focused on maintaining this strength moving forward Lilly's termination of the program forced us to make difficult choices about the optimal size of the organization."

Alkermes did not anticipate any savings in FY08 as a result of the restructuring. It said it expects to take a restructuring charge in 4Q of FY08 of $5 million to $10 million, associated with the workforce reduction and facility-related expenses. It will take an impairment charge of up to $15 million in 4Q of FY08 related to fixed assets at the Chelsea facility. It said that in FY09 it will see cost savings of $15 million-$20 million, with detailed financial expectations for FY09 to be issued in May.

Inverness, a manufacturer of rapid diagnostic products, said that it has begun closing two facilities in the San Francisco area housing its Cholestech and HemoSense operations, and also a manufacturing plant in Louisville, Colorado, which produces its BioStar OIA product lines.

The Cholestech operation, acquired by Inverness last September, manufactures the Cholestech LDX system, a point-of-care blood cholesterol monitor, and related lipids used to test patients at risk of, or suffering from, heart disease and related conditions. These operations will move to the Inverness Biosite facility in San Diego.

The HemoSense operation, acquired last November, manufactures the INRatio System, a hand-held blood coagulation monitor for management of warfarin, a medication used to prevent blood clots. It too is expected to be moved to the Biosite facility.

Inverness said the transfers will take place in phases over the next 12 to 18 months and will produce manufacturing savings of about $10 million annually, along with general and administrative savings of $5 million annually, beginning the second half of 2009.

The three operations employ about 345 people: Cholestech, 180; HemoSense, 95; and BioStar 70. Inverness said that "some reductions" in staffing levels for Cholestech and HemoSense are expected as these operations are consolidated with existing operations in San Diego over the next 18 months. Closing of the BioStar plant is expected to result in eliminating about 56 positions.

Restructuring charges of about $12 million are anticipated for all costs, write-down of equipment and leasehold improvements, severance cost and rent obligations, to be included as a component of the costs of the acquisitions of Cholestech and HemoSense. Closing of the Colorado manufacturing facilities is the result of Inverness's decision to exit the BioStar OIA product line, the company said. OIA products will be available for purchase through the end of 1Q09. Inverness said the closure will produce general/administrative savings of about $3 million annually, beginning the second half of 2008.

Restructuring charges of about $9.5 million are anticipated for write-down of equipment and leasehold improvements, severance cost and rent, to be recorded during the first half of 2008.

News of restructuring efforts:

Steris (Mentor, Ohio) reported initiating a program to boost profits and improve efficiency by generating annual operating savings of about $30 million.

The company expects to cut its salary and benefits expenditures by "reducing management layers" — though not reporting the number of staff cutbacks — "eliminating redundancies and consolidating functions where appropriate."

Other savings are anticipated to come from reduction in indirect overhead expenses through reduced consumption of goods and services and consolidation of service providers.

The company said that the program and estimated savings reflects a focus on North American operations but that other cost reductions will be identified in international operations It will incur a pre-tax charge of about $15 million during the quarter ended March 31, 2008, related to severance benefits and asset write-downs. Excluding the charge, the company reiterated its previously reported earnings range of $1.30 to $1.35 per diluted share for FY08. The company anticipates 50% to 70% of operating expense savings during its fiscal year ending March 31, 2009, with more details on expected FY09 performance provided on May 7.

"[I]t is important that we re-shape the operating model of the company to drive profitable growth," said Walt Rosebrough, president/CEO of Steris. He praised the contributions of employees dismised but said that the comopany must "become more disciplined with our overhead expenditure levels, which ... have increased at a faster pace than revenues ...."

Steris develops infection prevention, decontamination and health science technologies, products and services

• And Synergetics USA (O'Fallon, Missouri), a maker of microsurgery devices, said it will close its Philadelphia plant and merge the operations and production of generator products into its plant in O'Fallon Missouri. The company said the move is part of its strategy to improve product and component integration and increase operational efficiencies at all levels.

The Philadelphia plant currently has 25 employees, and the company said it will record non-recurring, pre-tax severance and related costs associated with this action, about $400,000, with the majority of these being cash costs. Ongoing annual cost savings from the closing are expected to be about $1.5 million, or 5 cents a share.

Dr. Jerry Malis will remain as chief scientific officer and will lead five engineers and technicians in the further development of Malis generators, while providing, the company said, "technical continuity."

Synergetics manufacures instruments for vitreoretinal, neurosurgery and ear, nose and throat surgeries.