Greatbatch Inc.’s medical products business is going through a change of heart.

The bulk of the battery and medical device maker’s business historically has come from the batteries and other components it makes for medical devices, such as pacemakers and implantable cardiac defibrillators that help manage the rhythm of a person’s heartbeat.

But that’s been slowly changing. While those cardiac rhythm management products still account for a little less than half of Greatbatch’s $646 million in sales, the company has been pushing hard in recent years to branch out into other segments of the medical device market, from orthopedic products to vascular components and equipment used in portable medical devices.

And now, Greatbatch is in the late stages of its most ambitious – and risky – part of its diversification effort: Making its own medical devices.

Greatbatch last week took the wraps off the first product to emerge from its five-year, $50 million initiative to develop proprietary medical devices: its Algostim implantable spinal cord neurostimulator to ease chronic pain in patients that can’t get relief through medication and other conventional therapies.

“We’ve been diversifying the company away from cardiac rhythm management. We’ve diversified the company into other [medical] segments to give it a more stable base of operations,” said Thomas J. Hook, Greatbatch’s president and chief executive officer.

“Now we’re going to develop a large-scale medical device system,” Hook said. “For Greatbatch, it’s a large departure from the street product technology that we’ve developed historically.”

It’s a sea change for Greatbatch, the Buffalo Niagara-born company that last year moved its top executives to a new headquarters in suburban Dallas. Greatbatch traditionally has supplied key components for medical devices, but until now, it has never tried to make its own.

“It’s the first time we’ve ever made an investment in completed devices. It’s been risky,” especially since the process will take upward of seven years before it finally hits the market, Hook said.

But the payoff, if it succeeds, could be substantial. “The innovative device has considerable scope to capture a significant share in the $1.4 billion spinal cord stimulation market,” analysts at Zacks Investment Research said in a report.

“This marketplace is still relatively immature,” with less than 10 percent of eligible patients using neurostimulation therapy. But Hook thinks more patients may be able to use Algostim because of its simplicity compared with existing stimulators. “This has the potential to be very impactful,” the report said.

Selling brain power

At the heart of Greatbatch’s business is its growing technology base, which has resulted in the company being granted nearly 1,200 patents, including more than 650 in just the last eight years alone.

“We have a large portfolio of intellectual property,” Hook said. “That intellectual property historically has been deployed in markets like cardiac rhythm management, but it hasn’t always been deployed in closely adjacent markets, like neurostimulation.”

And the company has focused most on neurostimulation.

Greatbatch executives had said relatively little about the Algostim product until now, when it rolled out its prototype devices to analysts during a Wall Street presentation last week.

Even so, the stimulator is still years away from the market. Greatbatch still needs to win approval for the device from the U.S. Food and Drug Administration, and the company plans to submit its application sometime during the second half of this year. Once that application is filed, Hook expects the approval process to take about a year-and-a-half to complete. Under the most optimistic scenario, Greatbatch won’t be able to start selling its Algostim spinal cord stimulator until the middle of 2015.

Meanwhile, Greatbatch is hunting for a bigger medical device manufacturer – probably one of its existing customers – to partner with it to help sell the device to hospitals and doctors.

“We’ll be the designer and the manufacturer, and we’ll partner for the actual sale and commercialization of the product into hospitals and to physicians,” Hook said. “That’s a business model that keeps us, being able to work with all of the device manufacturers rather than competing with them directly.”

It’s also a model that, if it succeeds in getting hospitals and doctors to use its Algostim devices, will allow the company to cash in more heavily on every unit it sells because the company will have done so much of the work itself. “With the Algostim system, 95 percent of it has been done by us, designed by us and manufactured by us,” Hook said.

“It feeds every one of the corners of Greatbatch, from plant capability to technology capability. We’ve never had this level of integration by the company in its own device before,” Hook said.

For instance, the company’s research and development center in Clarence came up with much of the underlying technology that went into the Algostim device. Its Alden plant will make the battery that goes into the small pulse generator that is implanted into patients. Its Clarence factory will produce the screws and the screw block that holds it together. The device’s case will be made at Greatbatch’s plant in Minneapolis, while other internal equipment is set to be produced at its expanded factory in Plymouth, Minn.

“What it means is more business that we’re feeding our own facilities and our own company, including those in Western New York,” Hook said.

Greatbatch has about 650 employees in Western New York and about 3,200 in all. Hook said the company’s local employment hasn’t changed since its announcement last spring that it would move its headquarters – and its four highest-ranking executives from Clarence to a Dallas suburb to be closer to a hub of medical device manufacturers there.

Creating new markets

Greatbatch is pushing into the medical device market, in part, because growth is expected to be slow – around 5 percent a year – in its existing businesses, although Hook believes the company can increase its profits at about double that pace because of the cost-cutting and efficiency enhancements it has made in recent years, including a series of plant consolidations.

Since Hook joined Greatbatch nine years ago, the company has more than tripled its sales to $646 million last year. The company’s profits took a hit last year because of a nearly $30 million cost Greatbatch absorbed to close its troubled Swiss orthopedic product factories and shift that work to new facilities in Indiana and Mexico.

That led to a $5 million loss last year, although the company’s adjusted operating earnings, excluding one-time items, strengthened by 9 percent. Greatbatch is predicting that its profits this year, excluding one-time items, will grow by about 12 percent this year, with sales growth of around 4 percent.

Greatbatch’s stock also has rallied, jumping by 58 percent from its October 2011 low, including a 28 percent gain this year alone to close at $29.81 on Friday. But the shares, while at their highest level since 2007, remain well below their all-time high of $44.69 set back in January 2004.

Within its existing business, Hook estimates that about 95 percent of all implantable medical devices today have at least one component made by Greatbatch. Hook’s plan is to capitalize on those existing ties with medical device manufacturers to either provide more components for those devices, from pacemakers and implantable cardiac defibrillators and others, or to produce broader systems for those device makers.

“You sell components, but the goal is to sell more components into that market,” said Glen Navarro, an analyst at RBC Capital Markets.

There are five major cardiac medical device manufacturers, and Greatbatch makes components for all of them, capturing between a third to half of those markets. But Hook thinks Greatbatch can win an even bigger market share.

Greatbatch may, for instance, make feedthroughs for three of those manufacturers. Hook’s plan is to try to convince those other two manufacturers to include Greatbatch feedthroughs in their future projects. “We’re extremely competitive and we can be more aggressive with customers that we don’t sell to today,” Hook said. “That will help us grow faster than the underlying market.”

And Hook said Greatbatch, which has made 10 generally small acquisitions over the last five years, is in the market for more deals, with roughly $400 million in borrowing capacity and cash that it can tap into.

“We’re going to stay within the businesses we’ve already identified,” Hook said. “We can leverage their technology and our operating skills and serve the same customers.”