Key Surgery Service Spurs Psicor Profits

Health care companies such as Psicor, a Rancho Bernardo-based provider of surgical services and equipment to hospitals, are finding an increasingly receptive market in today’s cost-conscious health care environment. That acceptance is perhaps best illustrated by Psicor’s 33% increase in second-quarter revenue and 81% jump in net income reported Monday.

A publicly held company that moved its headquarters to San Diego from Michigan a year ago, Psicor specializes in supplying hospitals with perfusion machines and technicians to operate them. Perfusion devices are the mechanical “heart and lungs� that keep a patient’s blood pumping and vital functions running during open-heart surgery.

Although the machines and the technicians are an indispensable component of any open-heart surgical room, the high cost of the equipment, the inventory of disposables and the difficulty of retaining trained perfusionists have persuaded many hospitals to contract with outsiders such as Psicor.

Need for Service Expands

As more and more hospitals opt to make open-heart surgery available--the number has grown to 700 hospitals today from just a handful 20 years ago--the market for Psicor’s services has grown. Of the U.S. hospitals offering open-heart surgery, Psicor has contracts to provide perfusion services with 81 of them or 12%, making it by far the largest perfusion provider in the country.

From 8% to 9% of last year’s 300,000 open-heart surgeries were performed with a Psicor perfusionist in attendance, Psicor executives said. Increased market penetration helped push Psicor’s second-quarter revenue to $9.3 million, up from $7 million for the same period a year ago, while profits rose to $497,000, up from $275,000 last year. Employees now total 300, up from 243 at this time a year ago.

Hospitals’ dealing with outside firms to procure hospital services and equipment is nothing new: administrators contract for everything from leased CAT scans, a sophisticated X-ray device, to food service. ARA Services of Philadelphia, for example, a company perhaps best known for food service, provides emergency-room medical staff to 450 hospitals across the country on a contract basis, up from 400 a year ago.

But hospital administrators have found outside providers more advantageous in recent years because insurance companies began reimbursing hospitals and doctors on the basis of DRGs, or diagnostic related groups, a system that places strong incentives on them to control costs. Outside contractors such as Psicor often enable hospitals to budget more effectively, with a better handle on costs, Psicor President Michael Dunaway said.

Another factor that indirectly has increased demand for perfusion services is the growth in angioplasties, a relatively new procedure by which cardiologists clear blocked coronary arteries with catheters. Although angioplasties do not involve surgery, only hospitals with open-heart surgery capacity--and, thus, a perfusionist on call--can perform angioplasties, Thomas Zech, Psicor’s chief financial officer, said Monday. The surgery “backstop� is needed in case something goes wrong with the angioplasty, he said.

Psicor also relieves hospitals of what can be a management headache, said Larry Haimovitch, a medical technology analyst with Swergold, Chefitz & Sinsabaugh investment firm in San Francisco. The rapid growth in open-heart surgeries has caused an acute shortage of perfusionists, which in combination with the high rate of burnout because of stress has made perfusionists a notoriously transient profession.

Psicor “provides the services without the hospitals having to commit to a full-time staff and without having to commit to recruiting these people,� Haimovitch said. Psicor employs the perfusionists full time and the hospitals contract for them only as needed, he said.

‘Cell Collection’

Besides perfusion, Psicor provides another, faster-growing operating room service called “cell collection.� The service, also called “autotransfusion,� involves the collection, cleaning and re-infusion of blood lost in major surgery.

Demand for the service, which is performed in any surgery involving high blood loss, has grown in recent years with the AIDS scare, Dunaway said. The device minimizes the need for blood transfusions and thereby the chance of contracting AIDS or hepatitis from infected blood.

After going public in June, 1986, at $7.50 a share, Psicor stock has lagged, closing unchanged at $6 in Monday over-the-counter trading. Irving Katz, director of research at Thomas Green/San Diego Securities said the Psicor shares may be selling cheaply because the stock market does not understand Psicor’s business.

The company’s earnings last year were hurt by a higher tax rate and the expenses related to Psicor’s move to San Diego from Brighton, Mich. Because of the shortage of perfusionists, Psicor was also forced to raise salaries last year by an average 24% as a competitive measure, Zech said, a measure that also detracted from earnings. Perfusionists make $35,000 to $70,000 annually.

For the fiscal year ended Sept. 30, 1987, Psicor reported net income of $1 million, or $.27 per share, on revenue of $28.3 million. That compares with net income of $1.2 million, or $.38 per share, on revenue of $21.2 million over the previous 12 months.

Dunaway, a 48-year-old former perfusionist who owns 70.5% of Psicor stock, founded the company in 1972. His wife, Trudy, also a former perfusionist, is Psicor’s vice president for operations.