Stericycle, Inc.

28161 North Keith Drive
Lake Forest, Illinois 60045
U.S.A.
Telephone: (847) 367-5910
Toll Free: (800) 643-0240
Fax: (847) 367-9493
Web site: http://www.stericycle.com

Public Company
Incorporated: 1989
Employees: 3,545
Sales: $516.2 million
Stock Exchanges: NASDAQ
Ticker Symbol: SRCL
NAIC: 562211 Hazardous Waste Treatment and Disposal

Stericycle, Inc., is the largest medical waste management company in the United States, with additional operations in Puerto Rico, Canada, Mexico, and the United Kingdom. Approximately 310,000 of the company's customers are small medical waste producers, such as doctors and dentists offices, outpatient clinics, and long-term and sub-acute care facilities, while another 7,500 customers, such as hospitals and blood banks, are major medical waste generators. General medical waste is either incinerated, or rendered into a recyclable material or usable fuel by means of autoclaving, which relies on high pressure and temperature to destroy pathogens, or Stericycle's proprietary electro-thermal, deactivation technology (EDT), which disinfects waste by means of low-frequency radio waves. Specific services include the Bio Systems Sharps Management Program, involved in the entire life cycle of the sharp medical tool, from procurement to disposal and verification to meet regulatory compliance; Stericycle Direct Return, helping customers manage expired medications; and Stericycle Infection Control Management Software, an infection tracking system intended to prevent the outbreak of costly hospital-acquired infections. The Company also markets Steri Safe Disinfectant Cleaner, a hospital-grade multipurpose disinfectant and cleaner. Stericycle is a public company based in Lake Forest, Illinois, its stock traded on the NASDAQ.

Company Emerges From 1980s Classroom Exercise

Stericycle was conceived by Dr. James Sharp, a physician who returned to school to earn a Masters of Business Administration. While studying startups and writing business plans, he developed the idea of a waste medical disposal company to complete a class exercise in 1986. The problem of medical waste became major news during the summer of 1987 when on several occasions used syringes, blood bags, gauze dressings, and other items washed up on a 50-mile stretch of New Jersey beaches, which had to be closed for reasons of public safety, resulting in the loss of $1 billion in tourism for the state. The problem was likely caused by illegal dumpers, and no incidents of this magnitude occurred again. Nevertheless, medical wastes in smaller quantities washed ashore in virtually all coastal states, and hospitals were known to toss bloody surgical gowns and others wastes into dumpsters. To quell the public outcry, Congress enacted the Medical Waste Tracking Act of 1988, a tepid response that called for a two-year pilot program to track materials that came in contact with blood or other body fluids in ten states. The publicity surrounding the issue also led to a number of entrepreneurs launching medical waste disposal companies, although many of them were fly-by-night affairs that did nothing more than burn or bury the waste. Sharp's business model for a medical waste disposal company also gained currency and became the subject of a newspaper article that caught the attention of businessman David Lane, who had experience in the healthcare and environmental management industries. He contacted Sharp and decided to turn Sharp's classroom business plan into a reality.

Sharp and Lane secured $7.1 million in seed money from John Patience, a partner in the Deerfield, Illinois-based venture capital firm of Marquette Venture Partners. Stericycle was incorporated in Delaware in March 1989 and opened its first plant, located in Arkansas, in February 1990. Just a month later, the founders began to step aside, bringing in a professional manager in the form of Jack W. Schuler, who became chief executive officer and chairman of the board. Schuler had 17 years of experience at Abbott Laboratories, where he rose to the rank of president and chief operating officer. Not only did Schuler provide invaluable contacts from his days at Abbott, he also brought with him a patent for the EDT technology, making Stericycle the first company in the $1 billion medical waste industry to possess a disposal process that produced recyclable material as an end product.

By the end of 1991, Stericycle had a roster of a dozen customers and revenues of $1.6 million. It was a small player with great ambitions, despite facing stiff competition from well-heeled solid-waste companies like Waste Management Inc. and Browning-Ferris Industries Inc. (BFI), which saw medical waste as a bundling opportunity. They could negotiate a single price with a hospital, for instance, that would include taking care of all of its wastes. As a result, the big players charged less to collect medical waste than the specialized companies could, and BFI and Waste Management began to gobble up the small companies. With its technological savvy, Stericycle was able to hold on during this period until tighter Environmental Protection Agency (EPA) regulations and increased fines began to change the industry dynamic and specialists were able to gain an edge. In the meantime, Stericycle filed an antitrust lawsuit against BFI in 1993. The matter was settled a couple years later.

New CEO Takes Over in Early 1990s

In May 1992, Schuler brought in a new CEO, Mark C. Miller, a 15-year veteran at Abbott, where he had served as vice-president in charge of operations in Africa, the Pacific, and Asia. According to Kathleen Murray writing in the November-December 1993 issue of Chief Executive, Miller "was in line to become CEO. But somehow, he found the idea of running an established company stifling, and he bolted for Stericycle. 'I realized that part of what I enjoyed was a team of people who are charged up to create something,' says Miller, an affable and easygoing former high school football star. 'It was that new buzz of creating.' "

All told, Stericycle raised $50.1 million from venture partners, which in addition to Marquette included State Farm Mutual Automobile Insurance Co. and Baxter Healthcare Corp. Baxter also forged an alliance to develop technologies to convert plastic syringes into recyclable fibrous materials, which would then be used to make the plastic containers to hold used medical sharps. A major selling point for Stericycle was its ability to recycle medical waste, rather than rely on landfills and incinerations. Not until January 1992 did the company open its first full-scale EDT treatment facility, located in More, Washington. Three more facilities opened in 1993, in Loma Linda, California; Woonsocket, Rhode Island; and Yorkville, Wisconsin. Starting in 1993, Stericycle also began spending some of its cash to grow the business through acquisitions. The first deal, completed in August 1993, was the purchase of Portland, Oregon-based ThermTec Destruction Service of Oregon, Inc. Next, in March 1994, Stericycle bought the assets of Recovery Corporation of Illinois, including containers, transportation equipment, and customer list. Later in the year, Stericycle added Safe Way Disposal Systems, Inc., a Middletown, Connecticut-based company doing business in Connecticut, New York, Rhode Island, and Massachusetts. Another acquisition followed in 1995: the assets of Safetech Health Care of Valencia, California. Largely due to these acquisitions, Stericycle saw its revenues increase from $5 million in 1992 to more than $21.3 million in 1995, a total that ranked the company second, albeit a distant second, in the medical waste disposal field to BFI. The company was still racking up losses, having burned through $38 million since its launch, but was well on its way to achieving profitability.

Stericycle completed four more acquisitions in the first half of 1996, including Bio-Med of Oregon, Inc. and WMU Medical Services of New England, Inc. in the month of January, and Santa Ana, California-based Doctors Environmental Control, Inc. and Sharps Incinerator of Fort, Inc. of Fort Atkinson, Wisconsin in May. To fund further growth, the company prepared to make an initial public offering (IPO) of stock in the second half of 1996. Underwritten by New York firms Dillon Read & Co. and Salomon Brothers and Chicago-based William Blair & Co., the IPO was completed in late August, netting the company $27.6 million.

In 1997, Stericycle acquired seven more companies with locations in New York, New Jersey, Washington, D.C., Baltimore, Ohio, Wisconsin, and Arizona. The additional business helped Stericycle to increase revenues to $46.2 million in 1997 and net income of $1.4 million, representing the company's first profitable year in its short history. Prospects for continued growth were also bolstered in 1997 by the issuance of new clean air standards by the EPA that targeted medical waste incinerators, calling for reduced levels of mercury, dioxins, carbon monoxide, and lead emissions. Stericycle further benefited because of its EDT technology as many competitors became willing acquisition candidates, opting to sell out rather than make the investment to upgrade their incinerators.

With 7 percent of the market, Stericycle still trailed BFI by a wide margin, but it became the industry's most aggressive consolidator and was not shy about stating its goal of becoming number one. In 1998, Stericycle completed 13 acquisitions, including BFI's Arizona business. The company also entered into a joint venture with a Mexican company to form MEDAM S.A. de C.V. and acquire Repesa S.A. de C.V., one of the largest medical waste service providers in Mexico. In addition, Steri-cycle licensed its ETD technology for use in Brazil. For the year, Stericycle increased sales to $66.7 million, resulting in net income of $5.7 million. Ironically, Stericycle also became the subject of anti-trust litigation in 1998, accused of colluding with BFI to divide territories in Utah, Arizona, Colorado. The matter was settled five years later, with Stericycle agreeing to pay a civil penalty and assume costs, while neither admitting nor denying guilt.

Company Perspectives:

We're Stericycle—an innovative leader dedicated to the management of infection control and compliance services. We offer a focused set of solutions that reduce exposure to risk, for a safer and more compliant workplace.

In some respects, possible collusion with BFI had become a moot point. After long expressing a desire to acquire its larger rival, changing circumstance made the dream a reality in 1999. Allied Waste Industries Inc. agreed to acquire BFI in a $7.3 billion deal and simultaneously announced that it would unload assets with at least $900 million in an effort to pare its debt. Allied was more than willing to part with the medical waste business, and Stericycle was a ready buyer, especially well situated because the third largest competitor in the industry, Florida-based Med/ Waste Inc., was struggling and had recently hired an investment banking firm to help it sort through its strategic options. There was a likelihood, nevertheless, that buyout funds or another company might be interested in BFI, prompting Stericycle to agree to pay $410.5 million for the company, which many analysts estimated was worth $240 to $300 million. However, with its strong balance sheet, Stericycle was able to secure the necessary funding to acquire a rival nearly three times its size. Another important factor in the BFI acquisition was that Steri-cycle eliminated a competitor that had been charging a low price for its service because of its bundling approach. Stericycle was now able to raise prices more in line with market realities, thus adding to the cash flow necessary to service the debt it took on to acquire BFI. As the unrivaled leader in its field, of course, Stericycle was not above cutting rating rates in select markets to thwart the aspirations of smaller competitors. In addition to BFI, Stericycle completed 14 other acquisitions in 1999. As a result, it placed tenth on Fortune magazine's annual list of the 100 fastest growing companies in America.

Selective Acquisitions in the 2000s

Stericycle entered the 2000s with a more selective approach to acquisitions, now focusing on tuck-ins in areas it already served. By gaining geographical density, management hoped to use its infrastructure as a competitive edge to win new accounts. Nevertheless, Stericycle remained open to acquiring a company in a new service area if the economics made sense. It also continued to pursue international opportunities to license its patented technologies. In 2000, Stericycle acquired seven companies, followed by seven more in 2001, including the purchase of Enviro-Med Canada, Inc. to move into the Canadian market. Sales jumped to $323.7 million in 2000 and improved to $359 million in 2001, while net income totaled $14.5 million in 2000 and $14.7 million in 2001 (held down due to high energy costs). At this stage, Stericycle controlled about 20 percent of the market, the only national player in the medical waste disposal field, 12 times larger than its nearest competitor, Med/Waste. Prospects were also buoyed by new clean-air rules set to go into effect in 2002, which would prompt many hospitals to shut down their incinerators and turn to companies like Stericycle to dispose of their medical wastes. The company had successfully integrated the BFI operations, and Wall Street rewarded the company's performance by aggressively bidding up the price of its stock.

External growth continued in 2002, when Stericycle added nine more companies in the United States. It also added to its Canadian business by acquiring Pyroval, Inc., based in Quebec. A key acquisition in 2002, although not completed until 2003, was the $41.5 million purchase of Scherer Healthcare Inc., the addition of which moved Stericycle into a new line of business, the disposal of sharp medical waste items. In January 2004, the company launched its Bio Systems Sharps Management Program to offer customers a complete turnkey solution for the handling of sharps. Sales grew to $401.5 million in 2002, while net income ballooned to $45.7 million. A dozen more acquisitions were completed in 2003 and 2004, including three Mexican companies: Proterm de Mexico S.A. de C.V., Sterimed S.A.de C.V., and Bio-Infex Servicios y Technologia S.A. de C.V. In 2004, Steri-cycle entered the United Kingdom through the acquisition of White Rose Environmental Limited. Sales totaled $453.2 million in 2003 and reached $516.2 million in 2004, while net income grew to $65.8 million in 2003 and $78.2 million in 2004.

There was new competition on the horizon in 2005 in the form of giant Waste Management Inc., which had sold most of its medical waste disposal business to Stericycle in 1996 and now decided to reenter the field. Regardless, Stericycle was well positioned to answer the challenged. In addition, demographics favored the company's long-term prospects: with an aging U.S. population requiring more medical attention in the years to come, an increasing amount of medical waste would have to be disposed of, and Stericycle was poised to pick up a major slice of the additional business.

Principal Subsidiaries

American Medical Disposal, Inc.; BFI Medical Waste Inc.; Enviromed, Inc.; Scherer Laboratories, Inc.

Key Dates:

1989:: Stericycle is incorporated.
1992:: Mark Miller is named CEO.
1996:: The company makes an initial public offering of stock.
1999:: Browning-Ferris Industries is acquired.
2004:: Stericycle enters the United Kingdom.

Principal Competitors

Med/Waste Inc.; Waste Management Inc.

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