Ortho after the Carlyle takeover: A Q&A with CEO Martin Madaus

Private equity loves a good med tech story. There are seemingly endless opportunities for financial engineering--rolling up companies or trimming them down with a restructuring. And, unlike their typical biotech peers, med tech companies often have revenues--even if they aren't growing very fast, or at all.

The biggest med tech PE buyout of 2014, by far, was the more than $4 billion purchase of Johnson & Johnson ($JNJ) unit Ortho Clinical Diagnostics by the Carlyle Group ($CG). Now, roughly two years after the deal was originally announced, Ortho wants to assure Wall Street that it's on the right track. That's especially important after reports earlier this year questioned whether the buyout lenders were on board with the company's earnings, which of course are no longer publicly reported.

Martin Madaus, who was a senior healthcare adviser to Carlyle, took over Ortho when the deal closed at the end of June 2014. He was previously chairman, president and CEO of Millipore ($MIL) and, before that, president and CEO of Roche Diagnostics North America.

Martin Madaus, Ortho Clinical Diagnostics CEO

He told FierceMedicalDevices in the interview featured below that Ortho has been actively investing in building out as a standalone company, which has dragged on earnings in the near term. But he added that Ortho has returned to revenue growth--and is aiming to get to about a 4% run rate.

To get there, Ortho is focused on delivering reliable and innovative products to hospital labs via a pair of businesses: its Immunohematology blood-typing business and its core Clinical Laboratory business. Madaus isn't particularly concerned that the emergence of point-of-care and remote products and services at all threatens the long-term future of the centralized hospital diagnostics lab.

Ortho has been relatively quiet on the dealmaking front in the past few years with only two smallish deals: one with Quotient in immunohematology and the other with Astute Medical for its acute kidney injury biomarker test. Madaus said these deals are emblematic of what Ortho is looking for since one is for new content that it can run on its machines, while the other is for a new platform technology.

Q: When you started out with Ortho, what were your goals for the company and how do you feel you've executed on those so far?

A: Ortho has been a global leader in in vitro diagnostics for many, many years. Almost 70 years or more. It is really number one in the field of immunohematology worldwide, but also in a significant position in clinical labs worldwide. That's the main reason why the company was acquired by Carlyle.

When we came in, in 2014, we focused the business on the core businesses for clinical labs and immunohematology, and worked on making the very comprehensive portfolio of more competitive products and also focusing on clinical diagnostics as an independent company and really bringing our customer service or our customer support scores to higher class level again.

We have recently introduced in immunohematology the Ortho Vision platform, which is a generation of automated analyzers, a game changer in immunohematology. We have also a strong pipeline to expand on that launch with multiple additions. In clinical labs, we have also built now a strong pipeline of future instruments and menus that will actually be starting this year and then in 2017 and 2018.

Q: In terms of the revenue growth, can you characterize the growth and maybe give me a sense of what the targets are going forward?

A: We're aiming to roll at market rates, or in some segments slightly above. In our industry, in these segments, the market rate will likely be around 4%. I think at that level, again, varying by geography, we'd be comfortable.

Q: Can you give me a sense of what the ultimate goals are for the company on the financial side--in terms of maybe eventually listing it publicly, preparing it as a potential acquisition target?

A: Yeah, all of the above. I would say it's early. A company like this definitely has a lot of interested parties, as we know from the past. There are very few scale companies in in vitro diagnostics available. Obviously, this is an attractive target. Ortho is large enough to do an IPO, so both are possible in the future.

Q: What do you think are the most important things that potential investors or potential acquirers would be looking for the company to accomplish?

A: Building a standalone capability, that means standalone financial systems, independent distribution, and being a fully integrated standalone company is the prerequisite. That's what we're working on today. That's one of our top three priorities. That should be completed by the end of this year.

Second, a company needs to grow. You don't have to grow like a startup, but you have to show that you have a strong position in the market and that customers like your services, your product. Sales growth is a good sign that that's happening again.

Third, I would say, is companies are looking for a good fit in terms of strategic fit, or companies are looking for getting into in vitro diagnostics that have maybe small or no footprint. They see this as a scale play from the few ways to actually get into in vitro diagnostics.

Q: You mentioned the split from J&J. How do you see the culture of the company as changing, if at all, since that split?

A: We certainly have a new spirit and energy when you compare Ortho as a division of J&J. We're independent. People are generally excited about the fact that they can take this business to become an independent stand-alone company. We have, in the last year and a half, added a little bit over 1000 new employees around the world. That's a testimony to the fact that we are a good story and people want to join us. They like our purpose, our mission, to save lives through diagnostics.

Q: Can you walk me through what your strategy is in terms of developing innovation internally, as well as partnering and dealmaking externally?

A: We've made two deals in the last year and a half. One is around a new platform technology with Quotient in this space of immunohematology for a very specialized field for typing of many, many, different blood types and antibodies, antigens, in one sample.

The other one is a content link in clinical labs with Astute Medical, which has developed a very innovative marker for acute kidney injury which is a very big problem for our hospital customers. These two are basically pretty typical for what we're looking for. One is new content, a new valuable medical content that we can put on one of our machines. The other one is a new platform technology that would be something completely new.

Q: The Bloomberg stories and the Moody's downgrade from earlier this year reflected some concerns on the earnings front. Can you give me a sense of how you might respond to those concerns?

A: Since we've become an independent company we reinvested in the new capabilities to grow the company. We're really working on building these back-office systems that are so critical to become a stand-alone company. That's also an investment. These are large multi-year efforts that are starting to show results now.

We know that we're acquiring revenues again; that is evident in our full year of 2015 results.

Q: Can you give me a sense of where you would like to see Ortho in 5 or even 10 years?

A: Ortho will be a stronger and more competitive stand-alone company very much focused on delivering value to our core customers which are the hospital customers. We'll stay in in vitro diagnostics, largely hospital-oriented organizations. We'll probably be much bigger in Asia, particularly in China.

Q: What do you see as the top priorities of hospitals right now, and how are you focusing Ortho to help address their concerns?

A: Hospitals have to adjust to the new payment environment. They're dealing with too much hospital bed capacity on the one hand [and] on the other hand, increasing demand for their services. Hospitals are trying to push more of their care as possible to push out into lower-cost environments, out more into ambulatory care or into physician offices.

That creates a different type of customer that wants to look to companies for solutions across different points in the network and helps them to standardize a little bit more. The hospital lab, even though it may be reconsidered, is there to stay. I'm really convinced about that. You do provide an essential service to so many, almost all, healthcare decisions.