He Sees a Deal That Has <i> Advance to Go</i> Written on It : Entrepreneur: Luther Medical Products of Tustin has struck a worldwide marketing agreement for its advanced catheters that the firm’s founder sees as the key to its future.

TUSTIN — Ron Luther’s prized gift from close friends at his 60th birthday bash in April was a customized Monopoly game, dubbed Ronopoly.

Each space marked a major event in Luther’s life--his discharge from the Marines, his daughter’s birth--and in his company--his first patent, his founding of Luther Medical Products Inc. All the spaces are filled, but Luther said his story hasn’t ended.

“We’re going to have to get a new game,” Luther said. “I’m not over yet.”

Luther said his company, which holds more than two dozen patents for special needles and catheters, is once again on the verge of taking off.

In March, the company struck a deal with Pharmacia Deltec, a St. Paul, Minn., firm that will market a Luther catheter line worldwide. Then the company reached a settlement in a product-infringement suit against Gesco International, a Texas firm that will quit selling a Luther-pioneered needle in July.

“There is no reason we shouldn’t be profitable from now on,” Luther said in a subtle Southern accent left over from his Missouri upbringing. “We have the markets, the partners and the resources. They’re all there now. We’ve literally run out of excuses.”

Excuses were needed previously.

For Ronald B. Luther, a former Marine pilot, has sent his company flying high before. Each announcement of a major deal, of more financing, has raised the hopes of executives and investors who later saw those dreams dashed.

In its 12 years as a public company, Luther Medical has had just one profitable year, 1990, when it earned a modest $16,000. More recently, it hit one of its low points, posting a loss of $766,360 for the fiscal nine months ended March 31. It attributed the loss to an inventory write-down and legal fees associated with the Gesco settlement.

But just as Luther refused to die when his plane plunged off the side of an aircraft carrier into the sea, he has refused to let his company go under.

“Ron Luther is a survivor,” said Robert Van Roijen, an original investor in Luther Medical and partner in Secor Investments, a Washington-based venture capital firm. “Somehow, he always came up with the money.”

While many entrepreneurs would simply file for bankruptcy protection, he said, Luther has continued to seek more capital and has used his own money to keep the company going.

“They’ve had so many false starts, and it’s taken so long,” said Larry Butler, senior vice president of Cruttenden & Co., an Irvine investment banking firm.

“He’s been in the trenches for 10 years, and now it is falling on deaf ears,” he said. “But they are at the point where the time has finally come. The local community really doesn’t understand what it means. We’re going to have a real company here.”

Luther started his company in 1979 and took it public the next year, raising $1.9 million by selling 19 million shares for 10 cents each. Luther, who has always been the single-largest shareholder, ended up with 20% of the stock.

Since then, however, Luther has relied mainly on his ability to persuade private investors to buy new stock in private placements to keep his company flush with cash. Luther Medical has raised about $4.4 million through nine private placements over the years, reducing Luther’s own stake to 11.8%.

Among those investments:

* In 1983, the company raised $200,000 by selling 500,000 new shares to Med-Tech Ventures Inc., a division of Warner-Lambert Co. in New Jersey.

* In 1984, Med-Tech increased its stake by paying $6,250 to buy 62,500 more new shares. Med-Tech eventually divested itself and got out of the medical-products business.

* In 1985, the company raised $400,000 by selling to Secor Investments 216,500 shares of convertible debentures--essentially loans that can be converted later to stock.

* In 1986, Canadian investor Fred Davies exercised an option to buy new shares over two years, eventually putting more than $1 million into Luther Medical’s coffers. He eventually sold most or all of his holdings.

* In 1991, the company raised $400,000 by selling 113,116 new shares to Belcor Inc., an Irvine investment firm.

* Also in 1991, the company raised $500,000 in a private placement to Gandalf Partners, an investment firm in the Netherlands. The company has 200,000 shares, plus warrants to buy 100,000 more new shares.

Cruttenden itself gained a small stake in Luther Medical’s success. It handled the private placements to Belcor and Gandalf last year and ended up with 36,887 shares of stock to sell to its brokerage clients.

The latter investments, coupled with a reverse stock split last year that provided one share for every seven shares outstanding, sent the company’s price from about $3 a share to nearly $10 a share in March. It has dropped since and closed Friday at $6.625 a share.

“Seeing is believing,” said Dan Jensen, a Cruttenden research analyst who is more dubious than Cruttenden & Co.’s Butler about Luther Medical’s prospects. “I see the money coming in, and then it runs out. What they have to have is the cash flow from their products coming in. You can only survive so long on financing.”

Indeed, revenue has remained relatively flat over the last three years, at $2.3 million to $3 million. For the fiscal first nine months, sales were $2 million.

“Luther is like so many entrepreneurs,” said Van Roijen, the original investor in Luther Medical. “Entrepreneurs by definition are optimists. When Ron Luther went into his business, he thought he had a better mousetrap and the world would be beating down his door. But he found he didn’t have the sales force to do it.”

Luther finally stopped trying to be all things in his company, giving up the presidency in 1990 to W. Tate Scott, his marketing director. Luther remains as chairman and chief executive but spends more of his time inventing.

“I eat, sleep and breathe catheters,” said Luther, who holds 26 patents on needles and catheters.

The industry for better needles and catheters is booming, and he is trying to position his company to get its share of the market.

The medical community is looking for safer products because of the threat of acquired immune deficiency syndrome, hepatitis and other infectious diseases, and it wants more durable and easier-to-use catheters for an aging population that seeks in-home care.

Overall, the $1.4-billion market for catheters is projected to expand to $3.4 billion in sales in five years, according to Market Intelligence, a high-technology research firm in Mountain View, Santa Clara County.

Luther, his colleagues and some investors are excited about the Pharmacia deal and a new product line that Luther Medical is unveiling.

They believe that the association with Pharmacia is the one that will put the company over the top and get the ball rolling for future product introductions.

“They’ve got a $6-billion company backing them up,” said Butler of Cruttenden & Co.

Marc Issacs, a financial analyst who joined the Luther board in September, said the brokerage community has not really looked into the Pharmacia deal.

“Especially considering our past history,” he said, “it is hard to get the attention of brokers. They want something new and exciting, not with a tainted past.”

Pharmacia, a subsidiary of Procordia AB, a Stockholm food and drug conglomerate, will market Luther Medical’s “Peel-Away,” or so-called splittable, needle and what Luther calls his peripheral inserted central catheter, which uses a softer material for more comfort.

The needle--the missing element in Pharmacia’s line of ambulatory pumps for catheters--comes apart after the catheter is inserted. In most cases, catheters are threaded over a needle, then inserted into a vein. The splittable needle is threaded over a catheter.

The new agreement guarantees Luther Medical at least $780,000 in the first year upon delivery of 50,000 catheters to Pharmacia. Luther Medical will also receive $1 million in distribution fees, paid over the course of the five-year agreement. In return, Pharmacia will get a $1-million note, which can be converted to Luther common stock at $7.50 a share.

The gem of the Pharmacia deal, Butler said, is Luther’s upcoming One-Cath product line. The catheter will not only incorporate the so-called stickless needle, which has a plastic sheath to protect health-care workers from accidental needle pricks, but could stay in patients even longer because of a special tubing material that expands inside a vein.

In addition, the settlement of the Gesco suit means that Luther Medical will have one fewer competitor. Gesco made between $8 million and $12 million selling the catheters with the splittable needle, and Luther Medical and Pharmacia will try to pick up that market, Butler said.

“There are those out there that have disliked” Luther Medical, Butler said. “But Ron Luther didn’t have the luxury of having a large bank hand him $20 million to develop his products. He’s been hand to mouth. He took the route (with a public offering) and had to survive.”

Even Luther’s fiercest competitors praise his colorful personality and persistence--one investor called him “tenacious as a bulldog”--in a business not known for its characters.

“He’s a delight,” said George Sinco, Gesco’s president. “He’s well known in the industry. He’s volatile. He can raise more money than any person I have ever seen in my life. He can get money out of a rock.”

As befits a character in the industry, he has an odd hobby: stunt flying. It is a passion left over from his Marine days, when flying was his only ambition. His office is still decorated with mementos of his military career.

“I was a died-in-the-wool, dedicated Marine officer,” Luther said. “I never wanted to do anything else but fly planes in the Marine Corps.”

His military career ended abruptly in March, 1962, when a tire blew on his plane as he was landing on the carrier Independence. The plane skidded off the deck and fell 110 feet to the water.

“I got sucked under the ship,” Luther said. “The screws chopped up the airplane with me in it. I was extremely lucky to get out. I was the only man to ever do it in the history of naval aviation--to go through the screws and survive.”

After his recovery, which took nearly a year, he retired a captain and took advantage of a chemistry degree by going to work for a small pharmaceutical firm. In 1968, he joined American Hospital Supply Corp., where he oversaw a division that led him into the medical products field.

He found his calling as he began to come up with ideas for making better needles and catheters.

“I’m just fascinated with all the opportunities to improve catheters,” said Luther, clutching a notebook of inventor’s drawings that he keeps under lock and key.

“Catheters were considered pretty much a commodity item in the medical arena, and the medical community was conditioned to accept too high a complication rate,” he said. “I mean, they’ll accept a 6% to 10% complication rate in some of these catheters. I don’t think that’s necessary.”

Luther spends hours at his so-called toy table, which is cluttered with needles, tubing and thread, as he works on inventions. He is developing a catheter that includes antibiotics to eliminate the risk of infections to patients.

The problem with specialized catheters is that hospitals--always looking to cut costs--need to be convinced that they should switch to the safer yet more expensive products, said David Anast, the editor of Biomedical Market Newsletter in Costa Mesa.

“The catheter industry is product, product, product,” Anast said. “The broader the product line, the more stable the revenue stream. If Mr. Luther, through all of his genius of inventing, can keep coming up with marketable products, then the (company’s) picture will continue to improve.”

The next step is having enough marketing power by forming partnerships with the giants in the medical field if customers are going to choose Luther products, rather than that of competitors, which are lining up with similar products.

“It’s a slow road,” said Russell Diehl, managing partner in Diehl & Co., an Irvine-based investment banking and brokerage firm. “It’s not a home run, bottom-of-the-ninth kind of thing. It’s the singles and doubles. You have to build on the product line.”

Luther recognized the need in 1990, and Tate Scott, the marketing director who also came from American Hospital, was promoted to president to handle day-to-day operations.

“You’re either a manager or a creator,” Luther said. “But very few people are creators who get their products marketed. To be part of that 1%, that successful inventors club, that’s better.”

Luther Medical weathered several unsuccessful deals before it finally found the right partner.

In 1986, the company appeared to be turning the corner when British BOC Group eyed Luther Medical for a buyout. The deal fell through when a catheter material developed by Luther was found to be too sensitive to alcohol to meet European medical standards.

The next year, the company struck a deal with Baxter Travenol Laboratories to sell its specially designed needles and soft catheters for use with premature infants. But that deal also fell through.

The breakthrough came in 1987. Luther Medical sold rights to a stickless needle to Critikon Inc., a Johnson & Johnson subsidiary in Tampa, Fla. Under the agreement, Johnson & Johnson attaches the needle to its own catheter products, including its ProtectIV. Critikon gave Luther advance royalties of $450,000, plus $150,000 to begin manufacturing the product.

The product is finally catching on. Sales of ProtectIV jumped 66% in the third quarter of 1992. Luther said 14 million units are expected to be sold in 1992, and sales should double next year.

“Things always grow slower than what you think they should grow,” he said. “Even with the tremendous advantage Critikon has in the marketplace for our device, sales haven’t grown as fast as we think they should. Now they are getting up there after three years.”

Even so, the Critikon deal gives Luther royalties at just a paltry 3 cents per catheter. Each catheter sells for about $1.50.

“When you rely on big companies, the little companies get the leftovers,” said Jensen, the Cruttenden research analyst. “But the leftovers are better than nothing.”

Large partners have been the only way that a small company such as Luther--with just a few marketing representatives--can get its products on the market.

“Luther has traditionally been really short of money,” Luther said. “The secret is to apply your resources to where they will do the most good. And we think that it is supplying them in the areas where these partnerships are.

“When we first started the Critikon agreement with the stickless catheter,” he said, “we literally gambled all the assets of the company. And that gamble has paid off.”

Luther Medical: A Long Time ‘On the Verge’ Analysts and Chairman Ron Luther have long insisted that Luther Medical Products Inc. is “on the verge of taking off,” but the Tustin company struck pay dirt just once: in 1990 when revenue hit an eight-year high and it posted its first annual profit. Healthy Revenue . . . Revenue more than doubled in the fiscal year ended June 30, 1988, when Luther began marketing its stickless catheters, and jumped again in 1990 when it began to sell its “Peel-Away” catheters. Revenue in thousands of dollars: 1985: $400 1992*: $2,010 Not So Healthy Profitability . . . In 1990, the company recorded a profit of $16,000. A Johnson & Johnson company took over manufacturing and marketing of Luther’s stickless catheter in 1991 and pays the company royalties. (Figures in thousands) 1985: -$671 1992*: $766 * Figures are for nine months Luther Takes Stock . . . Luther Medical broke out of its status as a “penny stock” during fourth quarter 1991, when it reincorporated and authorized a seven-for-one reverse stock split. A reverse split means fewer shares, but they’re worth more money. 1st Quarter, 1987: $1.06 3rd Quarter, 1992: $9.13