Just invent it

Just invent it

by Andrew Tellijohn   Scott Augustine is back in the lab.

The founder of Augustine Medical Inc., now Arizant Healthcare Inc., left his company in 2003 and sat out two years waiting for his noncompete clause to expire. While he acknowledges that he didn’t leave Arizant on the best of terms, he also says leaving was the best thing that could have happened to him.

The company’s sales skyrocketed over more than 15 years — from nearly nothing when he, his father and a family friend started it out of a garage in Kansas City to more than $70 million when he left. His role became more that of administrator than inventor. He realizes now that he was getting less interested.

“As the company got bigger, it just sort of got boring to me,” he says. “The chance to get back into the lab with people trying to solve problems gets me out of bed in the morning.”

Augustine has now started a new company, Augustine Biomedical + Design, which will focus largely on inventing and introducing new medical technologies to the market but will also delve into consumer products.

The Eden Prairie-based company has already introduced the Slapshot Rake, a device shaped like a hockey stick that efficiently and ergonomically moves leaves. If everything goes as planned, the company will have at least one groundbreaking medical product on the market this year as well.

With the help of a handyman father, Douglas, Scott Augustine has been inventing things his whole life. When Scott was 6, the Augustines moved to Tanzania so Douglas could fulfill his goal of doing missionary work. The family spent seven years there. Together, each year, the two of them would make a new go-cart or tinker on many other items.

In Tanzania, Scott Augustine says, “if you couldn’t make it, you didn’t have it.”

That carried over to Augustine’s adult years. He went to medical school with the intention of being a doctor and was practicing during his term in the United States Naval Academy. But at the same time, he was learning that much of the medical equipment that has been around for decades simply doesn’t work.

“Some of this stuff has been around for 50 years and it just doesn’t do anything,” he says.

So he began spending spare hours in his San Diego garage tinkering away on product designs. When he got out of the Navy in 1987 he took a full-time anesthesiologist job in Kansas City. His father left the ministry and moved there as well, and the two of them along with neighbor Dave Sorvig started Augustine Medical.

A venture capitalist in Minneapolis took notice, investing some money, hiring an executive to run the company and moving it to the Twin Cities while Augustine continued overseeing it from Missouri. Finally, when the business began to grow, Augustine left Kansas City, took a half-time anesthesiologist job at the University of Minnesota, and began running the company himself.

By 1993, the shop had grown to $15 million in revenue, and he left the hospital to begin running the company full-time. Augustine Medical was racking up patents left and right, earning kudos from Inc. Magazine, among others, for being at the forefront of innovation in the medical industry.

The product that first put Augustine Medical on the map is the Bair Hugger, a blanket that hooks up to a heater and keeps patients’ temperatures from falling during surgeries.

The Bair Hugger is used throughout the country. Dr. John Najarian, renowned transplant surgeon and a professor of surgery at the University of Minnesota Medical Center, says he never met Augustine, but knows him by reputation.

Augustine was still on staff as an anesthesiologist when he got the University to try the Bair Hugger. “He certainly is a very clever fellow,” Najarian says. “I don’t know what it did throughout the rest of the community or the country. At our hospital we tried it out and it became apparent almost immediately that we had a definite improvement in our situation”

The Bair Hugger improved patient care by keeping patients warm during operations, which are conducted in operating rooms generally 20 or more degrees below normal body temperature.

“It’s a very important advance,” Najarian says. “Prior to having the Bair Hugger, patients would have rather remarkable drops in their body temperature during surgery. This is a great advance because when the temperature goes down precipitously, blood doesn’t clot as well as it should and as a result you begin getting bleeding and all sorts of bad things happen.”

While the Bair Hugger and several other influential products left Augustine Medical with more than 130 patents, about 300 employees and approaching $70 million in sales, the company experienced problems along the way.

The company had invented, marketed and sold a product called Warm Up that research showed did a better job of healing wounds and skin ulcers and sores than any other on the market. Augustine Medical developed thousands of the product and they were selling well. Sales of the product hit $6 million in 2001.

Then the U.S. Department of Justice stepped in, accusing Augustine Medical and several associates of fraudulent reimbursement practices.

According to court documents, the U.S. government began investigating methods Augustine Medical recommended to its patients for obtaining Medicare reimbursements. In February 2003, a federal grand jury indicted Augustine Medical, Scott Augustine, two other Augustine employees and a consultant the company had hired for advice on Medicare reimbursement policies.

Augustine Medical pleaded guilty on May 6, 2004, to a felony charge of conspiracy to defraud the United States and withdrew from the upcoming trial. For its plea, Augustine Medical was fined $5.2 million. The company also paid the government $7.5 million to settle a civil lawsuit related to the criminal case, according to media reports.

Augustine believes to this day the company did everything correctly, and the Justice Department changed and reduced its allegations a handful of times. But after several years of fighting, Augustine himself pleaded guilty in September 2004 to a reduced misdemeanor charge for which he was fined $2 million and placed on probation for three years. The plea required no admission of intent to defraud.

“You can’t imagine how devastating it is,” Augustine says of having his reputation sullied by what he calls extortion. “I came up with a cure for a chronic disease that had never been cured before. We think we should be up for the Nobel Prize and here the Justice Department wants to make us criminals.”

Meanwhile, for other reasons, his relationship with the board at Augustine Medical was on the outs as well. He stepped down as CEO in 2003 over differences about the company’s direction.

He’s suing Arizant, seeking for the company to pay the $2 million fine and $309,692 in legal fees not covered by insurance incurred during the Medicare case, and other  issues. Trial began January 30 in Hennepin County District Court.

In its answer filed in court documents, Arizant claims Augustine did not meet the criteria under state statute for indemnification of the fine and legal fees incurred with the case, and is “barred from recovering relief” for a number of reasons including the doctrine of promissory estoppel.

“Defendants have discharged all of their obligations under any and all contracts and/or statutes at issue in this case,” according to the document.

In January 2003, Eden Prairie-based Augustine Medical Inc. restructured. Company officials announced that Arizant Inc. would be the parent company of Augustine Medical and Arizant Healthcare Inc. New York-based Citigroup Venture Capital Equity Partners acquired Arizant Inc. Terms of the purchase were not disclosed, though court documents indicate that shareholders received $72.59 per share plus an escrowed share amount of $3.61 for possible payment of $76.20 per share. The privately held company had $73.6 million in 2003 revenue.

John Thomas, president and CEO at Arizant, declined to specifically address the company’s relationship with Augustine or the litigation. In a statement, Thomas said, “Scott Augustine will always be a part of our company’s past. Now at Arizant Healthcare, we are focusing on the future. Many employees at our company have worked hard to earn our reputation for excellence and that effort will not cease.”

While many of the relationships Augustine had through his first company have soured, Arizant has provided him with much motivation for Augustine Biomedical + Design. He’s tried to negotiate to buy back the Warm Up patents to get back on the market a successful product that was pulled when the Justice Department began its investigation.

Augustine says he also used as motivation the dispute with Arizant over who should pay the fine.

Suing was one solution, he says. But he’s not into the “mercenary” aspect.

“There’s no sport to it,” he says wearing a sly grin.

Rather than just sue, he decided to try and beat the company at its own game.

So he invented Hot Dog, the next generation of patient warming that he says will lower the price point on Arizant’s Bair Hugger, be much more efficient and cost friendly, and have additional products to go along with it.

He says he offered to sell the technology to Arizant, but they declined.

“They chose to fight over this,” he says. “I just want the fight to be interesting. This is the way I compete. If you want to play this game, fine.”

Thomas cites the recent market introductions of the Bair Paws patient adjustable warming system and the new Bair Hugger Underbody Blanket as evidence that Arizant is still a leader in innovation and said the company will remain so. “Market results show our confidence in our people, our products and our services is well placed,” Thomas says. “We feel good about the future.”

Augustine’s new company has some other components that are different, the result of lessons learned over the years. For 20 years, his general philosophy was that innovation needed to be aimed at the highest-end performing technology. After reading “The Innovator’s Dilemma” by Clayton Christensen, he’s accepted that a higher percentage of success comes not from spending oodles of cash to shoot at the top end, but instead at finding an adequate solution to a problem at a reasonable cost.

With health care costs already spinning out of control, he says, “they need equipment they can afford.”

Another big change is that, while he has no fear of spending money to take new products to market, he will not invite outside investors in to help. He’s put “a couple million” into the business so far, and hopes to bring at least three products to market sometime this summer.

Augustine Biomedical + Design is more than willing to introduce a product for one to five years and then sell the technology to someone else. If the investment and cost of a product becomes too much for him to bear, he’ll spin that product off into a separate venture. But under no terms does he intend to invite outsiders into the main company.

“I don’t need to and I’m not going to,” he says. “I’m comfortable with that risk.”

Otherwise, inventing, he says, is a fairly simple process.

Friend and former colleague Paul Iaizzo, a professor of surgery physiology at the University of Minnesota and director of education at the Lillehei Heart Institute, says Augustine is an incredibly creative inventor. The two have known each other for 15 years – Augustine helped get Iaizzo an interview for his first job at the university – and they have worked together, providing feedback and encouragement for each other’s creative work. Augustine now speaks frequently at classes Iaizzo teaches, and the two were influential in the school’s introduction of a master’s degree in medical device design.

Iaizzo also is the inventor of the hockey stick-shaped rake Augustine Biomedical is working to get on the open market.

“I felt this was a perfect match for me to work with my good friend on it and try to help him out at the same time,” Iaizzo says of working with Augustine on the Slapshot. “He’s been a good ally to the university.”

The primary focus at Augustine Biomedical is on medical products, but if somebody comes to them with a consumer product that they think is interesting, they’ll pursue it.

While not every idea turns into a multimillion-dollar product, surprisingly few, Augustine says, are complete busts. Many have turned out quite well, as evidenced when you enter the two-story reception area at the Eden Prairie firm’s small office. Look up and you’ll see a wall of patent plaques, numbering 130 or more. Face the other direction and the company’s moniker is painted, graffiti-style, on the wall.

It’s all part of founder Scott Augustine’s efforts to foster the creativity within.

While Augustine acknowledges differences with many executives at his former firm and frustrations over the stigma of having pled guilty to a crime, he says he’s excited to be back doing what he loves. 

 “When it’s in your blood it’s really hard to sit on the sidelines,” he says.

Many of his employees are fans. More than half of the company’s now 18 employees worked for him when he ran Arizant.

“I always said that I would work with him again in a heartbeat,” says Chris Zander, senior product manager. “He portrays a lot of confidence. Yet at the same time, he is a straight shooter. If he doesn’t know something, he’ll let you know.”

Zander calls Augustine an “incredible businessman” and added that he’s fantastic at motivating employees, allowing them to take risks and generally remembering “there’s a reason you hired them.”

Andreas Deibel, vice president of research, development and operations, says he too was looking to get back to a smaller, more nimble company focused on innovation.

“This was an opportunity to start an R&D department more or less from scratch and set it up how we want it,” Deibel says. “It can be very challenging, but in a good way.”

Augustine, who’s 52, is clear on the fact that he doesn’t have to work. He does so because he loves inventing. But it also helps finance one of his other passions, the Peace House Foundation.

As he was approaching middle-age, Augustine’s focus shifted from working for financial gain to seeking significance in the world, he says. He spent seven years, between the ages of 6 and 13, living in Tanzania – and he loved it.

Its plight now concerns him. More than 13 million children in Africa have been orphaned by the AIDS pandemic, and reports indicate that number will rise to 35 million in coming years.

So he helped start Peace House, a nonprofit aimed at helping provide for the basic needs and then the education of children orphaned by AIDS.

“I’m not working because I need the money. I’m working because I like this kind of work,” he says. “It’s also a good excuse to go to Africa three or four times a year to keep an eye on the project.”

The organization is putting the finishing touches on the first phase of a school that will fit 640 students. They will continue building on that location likely until they reach about 2,000 students. After that, they may consider finding other sites to build additional schools, depending on funding.

Augustine Biomedical provides office space on the upper floor of its offices and Augustine himself serves as chairman of the Peace House board of directors.

Augustine’s passion and hands-on commitment last year helped lure Doug Nethercut out of a consulting business and into the position of executive director.While he’s not a micromanager, Augustine makes his goals clear and his passion for the mission shines through, says Nethercut, who has spent 25 years working with nonprofits in New York, Minnesota and Africa.

“I actually thought I was done being an executive director,” he says. “I had been enjoying being a freelance consultant, and told Peace House that I really wasn’t interested.”

But after a meeting with Augustine, he went on vacation to his cabin for a week and thought about the organization every day. As soon as he returned from vacation he called to see if the job was still available. He hasn’t regretted it.

“There’s such a thing as founder’s syndrome where somebody can’t leave any of the details alone. Scott’s not that way,” he says. “I think he really excels at seeing problems and seeing opportunities to solve those problems. He’s extremely dedicated to the mission of the Peace House.”

Augustine is dedicated to the Peace House’s mission. But he acknowledges that being involved with the organization also allows him to feed another pleasure, traveling overseas.

He has three sons whom he enjoys spending time with — one graduating from the University of Wisconsin, another attending there, and a third in high school. But when he has free time, he and his wife enjoy jetting to Africa and Europe. He says he loves the people and sites of southern France and northern Italy.

Though he doesn’t have to work, and he acknowledges not being as hungry for success as he was the first time around, he’s got plenty of motivation. Plus he is having a good time with the new company.

“We’re a start-up like any start-up,” he says. “Who knows which way we’ll go. But we think we’re working on some pretty interesting stuff.”

[contact] Scott Augustine, Augustine Biomedical + Design: 952.465.3502;  sa********@*******ed.com;  www.augbiomed.com. Andreas Deibel, Augustine Biomedical + Design: 952.465.3503; ad*****@*******ed.com;  www.augbiomed.com. Paul Iaizzo, University of Minnesota Medical School: 612.624.7912;  ia******@*mn.edu; www.visibleheart.com. Dr. John Najarian, University of Minnesota Medical Center: 612.625.8444;  www.med.umn.edu. Doug Nethercut, Peace House Foundation: 952.465.0050; do**@******************on.org; www.peacehousefoundation.org. Chris Zander, Augustine Biomedical + Design: 952.465.3503; cz*****@*******ed.com; www.augbiomed.com.