In 2005, Boaz Eitan, founder and CEO of technology company Saifun, said that he would work there "for as long as I live." That was in another age. Saifun then had a market cap of $900 million, and Eitan's stake was worth $400 million on paper. Company employees were forbidden to speak on mobile telephones in its offices, because Eitan felt that it reduced their output.
Five years later, Eitan left Saifun. The years leading up to his departure were turbulent even for a highly esteemed and daring manager like Eitan, who as an Israel Air Force pilot was captured and spent three years of his life as a prisoner of war in Egypt. Saifun, which developed unique non-volatile memory technology and reached a market cap of over $1 billion at its speak, lost its main customer, and its share price plummeted.
In an attempt to extricate itself from the crisis, Saifun merged with US company Spansion, but the move did not work out well, and Spansion itself, which was highly leveraged, was hard hit in the financial crisis of 2008-2009 and went bankrupt. It eventually emerged from bankruptcy, but Eitan handed over the baton and left the company. His shares were worth nothing. He still had tens of millions of dollars that he had earned as CEO, but his standing as the glamorous airman of the Israeli technology industry was battered.
In 2010, the market expected soul searching and contrition from Eitan, but he himself did not see, and still does not see, Saifun as a failure. Instead of dwelling on the past, together with his wife Tali he worked at building QCore Medical, a company developing infusion pumps.
"In 2009, when I was still at Spansion but already considering leaving, I asked my son Shaul to examine some companies in which we could invest as a family," Boaz Eitan says. "One of the criteria was 'not a medical device company', because we knew that that was not an easy sector. But he fell in love with the company."
Tali Eitan: "As his mother, I knew he would always break the rules."
Boaz: "QCore started developing its product in 1996. Shaul knew the company, and fell in love with it in 2008, but we still weren’t sure that it suited us. With the fall in the markets, the company had not managed to raise money and had reached insolvency," Eitan relates. It happened at the very same time as Spansion was going through the same process, just on a different scale.
"In 2009, we bought the company from the receiver for half a million dollars, and said we had made a reasonable gamble. If we succeeded in solving the company's problems - great, we would shortly have sales. If we reached a situation in which it was necessary to redevelop the product from the start, we would close down. We didn't know much about regulatory procedures in medical devices, and in that respect our ignorance was an advantage. When we started out, we hired 20 of the company's 50 employees, and the CEO, Eran Reshef, remained on our board of directors."
The company's main problem was finance?
Tali: "Finance, and a technological challenge. The company's product was a computer controlled infusion pump. At the time, it had already been approved for marketing in Europe and the US, but when we saw it, we realized that it was not a product you could go to the market with. It had a touch screen, but an old-fashioned, greenish one, and the market had already started seeing smartphones with touch screens as we know them today. So we started initial sales just in order to be in touch with the market, and meanwhile invested about a year in improving the product. Since then, we have been selling the same pump, and it still represents a threshold of innovation in the market."
Did the fact that you did not come from the medical device sector hinder you?
Boaz: "When they told me that selling prices in this market stay more or less fixed from year to year, I thought I'd fall off my chair, because in semiconductors they fall 40% every year, and a company has to improve accordingly. So this kind of thinking was an advantage."
Tali: "As a lawyer, I always thought I would work in one discipline, and today I work in many disciplines. I feel that a whole world has opened up for me."
Boaz: "Our good friends Kobi and Judith Richter also went from semiconductors to the world of medical devices, with great success."
Did they give you advice?
Tali: "Mainly that you shouldn't involve the family, advice that has not particularly proved itself in our case, and we even prefer to work the opposite way. As in their family, with us too, the children manage a subsidiary of the business (the Eitans' son Shaul manages Avoset - G.W.). Apart from that, another three of our five children, and three in-laws, work here."
How does the market you entered look?
Boaz: "We entered a pumps market that suffered from severe problems. In those days, infusion pumps caused 700 fatalities and tens of thousands of injuries annually in the US alone, because of faults in the pumps. At about the time that we started operating, the FDA, the US Food and Drug Administration, decided to sort out the market, and out of 18 pumps, only 4-5 companies survived the review. The business opportunity was a large one."
That was how Tali became involved in the company. "I didn't understand why we weren't managing to obtain approval for the new product, and in fact, on the advice of our consultants, we didn’t file an application for approval at all," Boaz relates. "The consultants would explain it to me and I kept feeling that I didn't understand. I said to Tali, join me for a few days a week and see if you can help."
Tali, an expert in intellectual property and commercial law, was at the time a partner in the firm of Eitan, Mehulal & Sadot, with experience in the US market. Today, she is still officially a partner in the firm, but QCore takes up all her time. "I would come in two or three times a week, and today I'm probably the employee with the most weekly hours in the office. If at one time Boaz would get annoyed if I brought work home, today he's happy."
Boaz says that the company's leading product, of which 85,000 units have been sold around the world, is a simple infusion pump, the advantage of which is its small dimensions and its flexible software. "Basically, we produce a lot of identical pumps, but we are able to adapt them to different diseases, and to different countries that have different treatment protocols, and to different languages, by means of the software. That is to say, a generic pump comes off the production line, and we complete it through the software. That's an idea we brought from the world of semiconductors."
Tali adds that the company's competitors are mainly pharmaceuticals companies that see infusion pumps solely as a means of administering their drugs, and not as the main product. Caesarea Medical Electronics, which is in the same field, was bought by Becton Dickinson (BD), "which although it is not a pharmaceuticals company, is a medical device and diagnostics company active in many fields."
The pumps sell for $1,500-2,000 to the end-consumer, and each treatment requires a perishable sterile part. The pumps are manufactured in Israel, because the production process is mainly automated and the profit margin on them is high. The perishables, on the other hand, are produced in Turkey, Costa Rica and Mexico, and sell for between $2-3 and $10 per unit. So far, some 20 million treatments have been carried out. "We don't manufacture the perishables in Israel because of the intolerable cost of labor," Boaz Eitan says.
The "hiccup" and its aftermath
In 2015, on the basis of sales of its main pump, the company reached a local peak: revenue of $50-60 million. "But," the couple says, "we had a hiccup." This hiccup put the company into a spin and a process of downsizing, but it now seems to have emerged from it.
QCore's hiccup was essentially similar to the event that almost finished off Saifun: reliance on a single main customer, which whom the ties suddenly changed.
Boaz: "We were distributing in 30 countries even before we had been in the market a year, and then we received exclusivity proposals from several players, among the rest from Hospira, which was a pharmaceuticals and medical devices company and a significant player in pumps."
Tali: "It was a luxury, because in this market there are almost no exclusive distributors."
You weren't concerned about dependence on a single customer?
Tali: "Certainly, but the opportunity was too good to miss. They bought a lot of pumps, invested a great deal of money in the joint activity, and agreed with us that they would replace all their pumps with ours. We were supposed to replace them in the market and develop all their future pumps for them."
Boaz: "The relationship with them was wonderful, and they made us very happy."
Tali: "Until…"
Boaz: "The ink was not yet dry on the agreement whereby we were supposed to replace all their installed pumps, when Hospira was acquired by the pharmaceuticals giant Pfizer, which has no medical device business at all. They bought Hospira for its drugs and looked for someone to sell the pumps business to. For two years, everyone was waiting to see who would be the next boss.
"A small to medium-size American company eventually bought Hospira's pumps business in late 2017, but they were like a minnow swallowing a whale and there were considerable digestion problems. A wonderful partner became a much less wonderful partner."
In March 2018, an agreement was reached, but even before that, at the end of 2017, the process led to downsizing. 30 of QCore's workforce of about 200 were dismissed.
"When we laid off employees, we didn’t know that the saga would end fairly quickly in an agreement that suited both sides," Tali says. "We still have not rehired, but we have returned to expansion, very cautiously. When you lay off employees once, you take care that it won't happen again."
Today, the company maintains a direct sales network in parallel to the slow marketing of its products by its partner, which is gradually exiting the picture. The direct sales network is currently being built up in France, and will shortly open in the US as well.
"The millennial generation is outstanding"
At the same time, the company has set up two subsidiaries: Avoset Health, which is run by Boaz and Tali's son Shaul, and produces pumps for home treatment, and Sorrel Medical, which has developed a product for administering biological drugs.
Boaz: "Avoset's pump makes it possible for a patient to monitor a drug regime at home easily. We teamed up with cybersecurity company Axonius, which together with us developed an application for drug companies enabling them to see easily their entire fleet of pumps on the market, and to learn patterns of use of their products. This information will also make it possible to charge according to actual use of a drug. For pharmacies and hospitals, information will be available on specific patients, showing whether they take the drug properly."
Tali: "A product like this makes it possible to discharge patients and let them go home earlier. I'd like to set up a more holistic startup for home medicine, an area that is stagnant in Israel."
Sorrel's product is similar to an insulin pump, but it delivers substances in higher volumes at a low price.
Boaz: "Here we are no longer in pumps but rather in drug delivery. There are 1,100 biological drugs on the market or in development, and the goal is to administer them by subcutaneous injection or, but because of the high quantity of fluid in the injection, if it takes more than ten seconds, then problems start. Dividing it into several injections is an unpleasant option for patients, who are liable to stop taking the drug. Children do not take a growth hormone even though they very much want to grow. Adults too stop taking life-saving drugs.
"So we are starting to get over any regret at going into medical devices. Here we are solving a problem that really had no solution. Today, we are being courted by all the major drug companies in connection with this pump." <pHave you managed to restore QCore's sales volume?
Tali: "We're in a good place. We won't reveal the sales figures just now, but in the past year we distributed $20 million in dividends (the family itself is the main shareholder and the main beneficiary of the dividend - G.W,), and we gave the employees bonuses equivalent to three monthly salaries."
The employees at your neighbors, Caesarea Medical Electronics, who started a union, will doubtless be overjoyed to hear of it.
Boaz: "You're talking to the most socialist capitalists there are."
Tali: "Speak for yourself."
Boaz winds up the conversation with the customary thanks to the employees, but with a twist: he is full of compliments to the millennial generation, which is mostly the object of criticism from its elders.
"Our employees are superb, and they're not exceptional. That's this generation. They may be less stable, but their quality is outstanding. They learn fast, understand fast."
Published by Globes, Israel business news - en.globes.co.il - on March 27, 2019
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