February 12, 2010 / 7:07 PM / 8 years ago

Chip maker Zarlink puts big bet on medical sector

OTTAWA (Reuters) - Five years after Kirk Mandy's return to resurrect Zarlink Semiconductor ZL.TO, the chief executive says the "heavy lifting" is done and it is time to see if strategic wagers will pay off for the one-time Canadian high-tech leader.

In his second tour as top boss, Mandy said he has whittled down "a dog's breakfast" product line, that spanned a swath of markets and racked up big losses, to "an incredibly tight focus".

"Nobody can do it all and our game plan is to be the best in the world at what we choose to do," he said in an interview with Reuters. "That means we spend a lot of money on a fairly narrow set of the market."

Alongside its bread-and-butter market of communications chips, which generate 60 percent of sales, Zarlink has made a big bet on the medical device market, investing heavily in ultra low-power, high frequency radio chips.

The transmitter chips are already in Given Imaging's GIVN.O Pillcam, a device that takes some 60,000 images of the digestive tract after it is swallowed. They are also in St Jude Medical STJ.N pacemakers, creating a "body area network" that lets doctors wirelessly monitor and adjust the devices.

Today, Zarlink and its customers are developing drug pump systems, which will monitor diabetics' blood sugar levels, for example, then deliver insulin as needed.

There is also work on deep brain stimulation devices, which use implanted electrodes, wired to a pacemaker, to run electrical current to a specific part of the brain. The treatment can help people with disorders ranging from Parkinson's disease and tremors to depression and epilepsy.

Zarlink also led research that, in 2008, developed a prototype device that can "harvest" energy from a heart beat to produce one-third of the required energy to power a pacemaker.

TOUGH TURNAROUND JOB

Prospects have not always been so promising for Mandy.

After 21 years at Zarlink, including three years as CEO, he became vice-chairman in 2001. He came out of a management hiatus in 2005 to again take the top job and effect a turnaround.

He pulled the plug on R&D projects, sold business units, slashed 150 jobs and fended off a shareholder revolt that aimed to replace him and his board in 2008.

Their discontent was fueled, in part, by a string of losses at the Ottawa-based company, which was hurt by a slump in the semiconductor sector that choked demand. Shares that peaked at nearly C$43 in the tech boom, crumbled to a low of 22 Canadian cents in March 2009.

In 2001, Zarlink was spun out of Mitel Corp, a corporate heavyweight founded by storied high tech entrepreneur Terry Matthews. But poorly planned R&D left the company without new chips to replace aging product lines, Mandy said.

"The semiconductor industry is a very expensive game to play and a product gap is probably the most serious situation you could have," he said. "The second most serious is when you're under-spending on too many things ... that was the other problem we had."

No longer. In addition to its medical device and communication chip units, there is an optical business Zarlink hopes to sell. It will take a bigger investment than Zarlink is willing to pay to lead the market, Mandy said.

The firm is spending about 30 percent of its R&D budget on chips for medical devices, a market Mandy sees poised for explosive growth as health care systems face an aging population and tight budgets.

"We have a revenue run rate in the $30 plus million a year range today. I can see that business growing to around $100 million over the next three, four years," he said.

"The market for low-power radios in the medical industry is growing and will be a multibillion market over the next five years ... probably in the $10 billion range."

Zarlink's communications products, for line circuits and network timing and synchronization, are also set for growth, particularly from the swell of smartphone traffic and carrier investment in broadband and wireless networks, Mandy said.

About half the unit's sales stem from China, home of low-cost, high-growth telecom equipment suppliers such as Huawei HWT.UL and ZTE (0763.HK).

Profitable in five of its last seven quarters and forecasting better than expected results for its upcoming fourth quarter, Mandy said Zarlink has successfully refocused.

Shares worth 29 Canadian cents a year ago have more than quadrupled, ending on Friday at C$1.30 on the Toronto Stock Exchange. The stock was delisted from New York in 2008 for trading below $1, but will likely be listed on Nasdaq in coming years, Mandy said.

But in a consolidating industry, with "too many companies chasing the same dollars", it must decide to eat or be eaten.

"Will be acquired by somebody? I don't know. Will we be the acquirer and continue to grow in that regard? I don't know," he said. "But it's our intention to continue to build the company as an independent company."

($1=$1.07 Canadian)

Reporting by Susan Taylor; editing by Jeffrey Hodgson and Rob Wilson

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