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This past Thursday, I interviewed Josh Kornberg, CEO of BioDrain Medical (BIOR.OB). BIOR.OB makes The Streamway System, an FDA approved device that safely and economically disposes of patient fluid produced during surgical procedures. BIOR.OB's device competes with the traditional "canister method" of waste disposal, Stryker's (SYK) Neptune Waste Disposal System, and a few other smaller competitors. However, recently the FDA issued a Class I recall (recall resulting from patient death) on SYK's Neptune System, opening the door for BIOR.OB to take significant market share. What follows is an edited version of the interview I conducted with Mr. Kornberg.

Daniel Lauchheimer (DL) -- Can you talk about the current market for patient waste treatment?

Josh Kornberg (JK) -- Sure. When patients have a surgical procedure they produce a lot of fluid that requires disposal. Currently, hospitals dispose of the fluid by filling up a canister, and dispose of the fluid in the canister in a variety of ways. This method has many problems namely:

  1. Environmental -- the waste must get treated properly, and then gets sent to a landfill -- not an environmentally friendly method of disposal.
  2. Cost effective -- hospitals must spend a lot of money on the canisters, their accessories, and the attending environmental costs.
  3. Space -- the canisters, and their accessories take up a lot of space in the operating room
  4. Staffing -- Hospitals need to keep another person on staff to collect the waste and dispose of it safely.
  5. Time Consuming -- Hospitals must take a large amount of time ensuring the waste gets disposed of properly.
  6. Liability -- This is the most critical problem. By having hospital staff handle this waste, they expose themselves to blood borne pathogens such as HIV and Hep-C.

DL -- And how does your product improve on this system?

JK -- Our product substantially improves upon this method. We make the Streamway System which removes human fluid through a tube, passes it through a monitor that keeps track of how much fluid it has collected, and finally disposes it directly into the hospitals waste disposal system. Essentially, our device takes out all of the human involvement in the process, and thus effectively eliminating any chance of the hospital incurring any sort of liability through hospital staff contact with patient fluid. In fact, OSHA has pointed this fact out, and made specific recommendations on limiting the possibility of hospital staff contact with patient fluid. Our product solves the issues from the above list in the following ways:

  1. Environmental -- our product hooks up to the hospitals waste disposal/sewage system, and allows the waste to get treated by local treatment plants.
  2. Cost effective --Though we have a higher upfront cost, in the long run, hospitals end up saving money through our product.
  3. Space -- Our device gets installed into the wall of the operating room thus eliminating the use of valuable floor space.
  4. Staffing -- hospitals do not have to keep extra staff on hand to handle the canisters and their disposal.
  5. Time Consuming -- Our devices self clean, and can perform the next surgery in 5 minutes after the previous one.
  6. Liability -- Because hospital staff do not come in contact with any of the waste, they cannot contract any diseases.

The canister method makes up about 80% of the waste disposal market.

DL -- Where is the rest of the market?

JK -- Mostly it goes, or more accurately, went to SYK's Neptune system.

DL -- How did the Neptune device improve on the canister system? And how is your product different?

JK -- Let's take a step back. The Neptune System is a set of canisters located on the floor underneath the operating table, once they get filled up, a member of the hospital staff takes the canisters and places them in a second machine that disposes of the fluid waste through the hospitals waste system. The improvements here lie primarily in the environmental area, and to a lesser degree in the liability of staff member infection. Our device, on the other hand, doesn't take up any space in the operating room floor, and disposes of the waste directly into the hospital sewer system, thus eliminating the necessity of having a member of the hospital staff involved in the process.

DL -- You have an interesting personal background -- previously in your career you held senior positions in the real estate business, at The Lightstone Group, ARK Realty Investors, and RREEF Funds. Can you talk about the somewhat unusual switch from real estate to the healthcare space?

JK -- Before BIOR.OB I worked in the real estate business, but my focus there wasn't on the bricks and mortar per say, it focused more on workouts and distressed situations, which I can apply to different industries. After my last job, I started a private equity firm, and my partner in that venture is a practicing physician, so healthcare deals come across our desk. When they do, he evaluates the medical elements of each deal, and I take care of the financial/management side of things.

DL -- Are you still active in your PE firm?

JK -- No, my partner has taken over the general management of the PE firm, and I am completely focused on running BIOR.OB.

DL -- BIOR.OB started in 2002, and went public in 2009. You joined the board in March 2012 and became CEO shortly after. Could you give a little bit of the company history, and why you were brought in?

JK -- The original inventors of the device started the company in 2002. I, and my partner found out about the company, and we conducted serious due diligence -- we spoke with doctors, surgeons, and hospital administrators, and they all really thought the technology had a lot of potential, so we made an investment. However, early on I became disappointed with management's performance, so I took a more active role. I joined the board in 2012, and became CEO shortly after in order to better manage the company. Since then, I completely stripped down the company from a management point of view, built a totally new infrastructure, and sales force to sell the device. We have since vastly improved our gross margins, sales force, and have taken steps in getting the device approved in Canada and Europe. .

DL -- Earlier this year, the FDA issued a Class I recall on SYK's Neptune System -- this event together with your great product, and overhaul of the management side of things should produce great results. What concrete steps have you taken to improve the previously broken sales structure?

JK -- A lot of the problems in sales, had to do with previous mismanagement. I overhauled that part of the business, and as you mentioned we also have a huge benefit of not dealing with SYK because of their class I recall. We hired two people in direct sales, and want to ramp it up to a dozen. We also have been dealing with smaller distributors and have had serious discussions with the top 6 distributors nationally. However, with that said I want to maintain strong quality control which I won't sacrifice in the interest of taking market share.

DL -- You have an interesting business model -- not only do you sell the device, but you also sell a one-time cleaning solution and filter that hospitals will use for each surgery. Do you sacrifice gross margins on the devices, and make all your money from the solutions and filters?

JK -- We do run on a "razor blade model", but that doesn't hit gross margins, in fact since I came on board we have doubled gross margins to about 80%. With that said, the recurring revenue stream of cleaning solution and filters is one of the main things that attracted me to the business.

DL -- Could competitors come in and take market share from you on the cleaning solution and filter side of the business?

JK -- No, we have a proprietary model that makes it impossible for hospitals to buy these items from a different company.

DL -- Gross margins have been volatile the past two quarters -- very high in Q2 and negative in Q3 -- can you comment on why that is, and what investors can expect going forward?

JK -- We don't have an inventory based model, a lot of the volatility had to do with us switching manufacturers for our devices, and dealing with the hiccups from the switch. Going forward investors should see a smoother gross margin number.

DL -- In the past you have covered your liquidity gap by using your stock as currency. This has ramped up in the past two quarters. Could you comment on your use of stock as currency, and your plans for the future.

JK -- A lot of the dilution came from previous management financing operations with convertible debt that had "floorless converts", and investors holding those instruments converted their debt to equity on very favorable terms. However, during the most dangerous period for the company I personally financed a lot of the operations with my own money, and didn't use our stock as currency. I currently own 40% of the stock with my partner, and as such have no plans to dilute the stock.

DL -- Do you have any plans for future products?

JK -- We have a strong R&D group, and if something really interesting came across my desk I would spend a few minutes looking at it, but in general we have a singular focus on marketing our current product and getting it into as many operating rooms as possible.

Source: BioDrain Medical Is About To Clean Up: An Interview With CEO Josh Kornberg