Venture Capital: Recycling can be a healthy business

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Friday, May 2, 2003

Venture Capital: Recycling can be a healthy business

By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER

Pepsi cans. Newspapers. Cardboard boxes.

Those are the items that typically come to mind when one thinks of recycling.

But a Bellevue company is trying to make its mark by recycling something much more valuable: medical devices.

ClearMed Inc, which recently landed $7.2 million in venture financing, has developed a pasteurization process that cleans and disinfects breathing tubes, oxygen masks and other medical equipment by using hot water at temperatures up to 170 degrees Fahrenheit. The company plans to use the $7.2 million capital infusion to open three new pasteurization facilities, including a 60-person operation in Dayton, Ohio, in June. The venture capital round, which included investments from Integra Ventures, Buerk Craig Victor and Star Equity, is the first in the company's 34-year history.

With hospitals and surgery centers looking for creative ways to cut costs and reduce waste, many are recycling used medical equipment. About 25 percent of all U.S. hospitals reprocess devices, according to a study by the Food and Drug Administration. Forty-five percent of the largest hospitals in the country employ the practice. More than 60 hospitals are currently working with ClearMed, including Overlake Hospital Medical Center, Swedish Medical Center and Virginia Mason Medical Center.

These hospitals can save up to 70 percent of the cost of a new medical device by reusing equipment.

That cost savings is part of what attracted Gary Craig, managing partner at Buerk Craig Victor in Seattle.

"The health care industry could obviously use a lot of help these days and they can save a lot of money by doing (reprocessing)," said Craig, who is joining the board. "We feel comfortable there is a pretty good market."

Founded in 1969 as a manufacturer of disinfectant equipment for the health care industry, ClearMed switched its business model in 1997 to one that provides reprocessing services. Business has boomed since and now ClearMed's revenues are growing 20 percent each month. Revenues are expected to top $5 million this year, which would eclipse the peak sales figures when the company was manufacturing pasteurizers and dryers.

Although recycling used medical equipment may sound like an unsanitary practice, it has been occurring at hospitals for years. In the past decade, more than a dozen third-party medical device reprocessing companies have popped up.

A 32-page report on the industry by the General Accounting Office in June 2000 found that careful reprocessing of medical devices "is not a demonstrated public health risk." But the report also indicated that little is known about the industry and some devices simply can not be recycled.

ClearMed, which is registered with the FDA, assures customers that its pasteurization process effectively removes pathogens that could lead to infections.

"The device has to be of the same quality as when it was originally sold new," ClearMed Chief Financial Officer Kevin Kelley said. "So there are very stringent requirements." The company has never been sued over a failed device being introduced into a hospital. About 10 percent of the devices cleaned by ClearMed are discarded because they do not meet FDA standards, Kelley said.

Unlike larger competitors such as Alliance Medical, SterilMed and Vanguard Medical that use a sterilization technique involving ethylene oxide, ClearMed relies solely on pasteurization. Because of that process, it cleans only those non-invasive devices that come in contact with the skin.

Overlake Hospital has been using ClearMed for the past two years to clean a sequential compression device that controls blood flow. Before contracting with ClearMed, the hospital would dispose of the device after each time it was used.

Now, the hospital can get five to 10 uses out of one device.

"They probably save us 50 percent on the sleeves," said Kevin Burns, manager of distribution operations at Overlake.

The hospital is now exploring the possibility of recycling additional equipment with ClearMed, including breathing circuits and a mechanism used by cardiologists.

ClearMed sends a delivery van to Overlake hospital each Wednesday to drop off the cleaned compression devices and pick up any that need to be decontaminated.

It also sends vans to hospitals in Oregon for weekly deliveries. Hospitals in Idaho and California currently use a courier service.

Although the personal delivery service is expensive, Kelley said that will be the model the company employs as it expands in the Midwest and on the East Coast.

"It really emphasizes the service component of it," Kelley said. "It also speeds up the rate of inventory for the hospitals, which obviously results in much greater savings for them."

ClearMed guarantees a 10-day turnaround on devices and in most cases can clean and return them in five days. A typical hospital sends anywhere from 2,000 to 5,000 devices to the company's Bellevue facility each week for reprocessing.

Now that the company has landed its first round of capital, Kelley said ClearMed is ready to grow.

"It is an exciting business," he said. "And it is not difficult to understand the fact that there is a true value proposition between us and our health care partners."

P-I reporter John Cook can be reached at 206-448-8075 or johncook@seattlepi.com. For more information on Seattle-area start-ups or venture capital firms, visit www.seattlepi.com/venture.

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