UK: A regular look at small business - SLE.

UK: A regular look at small business - SLE. - You're a niche manufacturer. You make a narrow range of highly specialised equipment, and you're largely dependent on one huge public sector buyer. Comes the recession. The customer, in the throes of reorgani

Last Updated: 31 Aug 2010

You're a niche manufacturer. You make a narrow range of highly specialised equipment, and you're largely dependent on one huge public sector buyer. Comes the recession. The customer, in the throes of reorganisation anyway, suddenly has no money to spend. Orders for both your main products all but dry up. What do you do? The answer depends mainly on what size of business you are. If yours is a public company you probably 'downsize' double quick: sack half the workforce and stop every activity that isn't making a positive contribution to overheads. If you're a small private company there's unlikely to be much scope for downsizing. You can put your personal affairs in order, kiss the wife and kids goodbye and jump off a cliff. Alternatively, you can throw all your resources into developing a new product which you believe the customer will have to buy - and pray that you're right.

That's what SLE (Specialised Laboratory Equipment) did. SLE makes electro-medical appliances in a cramped and leaking factory in deepest suburban Croydon. Though no more than a small company, with 30-odd employees and £2 million of turnover, SLE is the leading British manufacturer of electro-encephalographs (EEG machines, used for measuring electrical impulses within the brain); also of infant ventilators, which keep tiny babies alive by controlling their breathing.

In the sense that these products are ordered at the behest of different clinicians, working in different departments of a hospital, the company may be said to occupy two parallel niches. But since the biggest buyer is in both cases the National Health Service - whose financial and other worries are the stuff of every morning paper - that was little consolation as the 1980s gave way to the knotty '90s.

'The recession hit us early,' says chairman and founder, Denis Nelligan. Sales of infant ventilators were ominously down as early as 1988. The next year the company doubled its marketing effort but in 1990 unit sales of ventilators fell again - dramatically. On the EEG side, demand was weak anyway, partly because of the take-up of newer imaging technologies (brain scanners rely on nuclear magnetic resonance, NMR), but mostly because the market was near saturation. EEG techniques had been around for a long time and the 250-odd EEG departments in the hospital service were well provided with machines. 'The equipment lasts too long,' says Nelligan with a quick laugh. Luckily for SLE, in the late 1980s a valuable piece of new technology fell into its lap. Doctors and engineers of the Royal Postgraduate Medical School at Hammersmith Hospital had just developed a valveless infant ventilator which showed significant advantages over conventional machines. It delivered inspiratory gases (a mixture of air and oxygen) at a higher rate and in a superior waveform compared to anything on the market. The innovation was offered to SLE because, explains Bill Matthews, managing director of Caduceus, a wholly-owned subsidiary of the medical school which handles all its commercial ventures, the company was 'the last remaining (infant ventilator) producer in the UK'. This was not strictly true but the only potential rival, a subsidiary of Vickers, seemed to be suffering an identity crisis, while SLE was firmly committed to UK manufacture.

The licence cost the company £20,000 plus an undertaking to pay a small royalty on every sale. But it was many months and a further £300,000 or so before the new SLE ventilator could be launched. Throughout the development phase there was close cooperation with the medical school. But the product that appeared at the end of 1990 was more than a packaged version of the hospital laboratory lash-up. SLE introduced improvements of its own: like the alarm system and a trigger device which synchronises the machine with a sick and premature baby's attempts to breath naturally.

It was one thing to announce a new product - the SLE 2000 infant ventilator - in December 1990; quite another to drum up sales. But a partial solution was to hand. During the second half of 1990, pre- production models had been put out to five paediatric units, to conduct clinical trials in the normal way. The machines were reportedly so effective that at the end of the trials the company had some difficulty in recovering its property. Nearly half the first production batch of 25 ventilators were introduced into hospitals in much the same way: offered to paediatricians on a sale-or-return basis, with SLE staff instructing hospital technicians on site. Nobody could lose - and naturally there were few returns.

Export orders for Ventilators climbed in parallel with the domestic recovery. Agents as far away as South America suddenly came to life, putting in multiple orders. A few weeks ago Colombia wanted seven machines and Greece eight. The previous biggest export order from one source at any one time, reports Bernard Nelligan, son of Denis and managing director of SLE, was for five machines. Overall, the company sold roughly twice as many ventilators last year as the average of the previous three years - and more than three times as many as in 1990. The product is still selling 'like hot cakes', according to Mike Donovan, who joined as service engineer in 1955 and is now engineering director. 'We must be the only medical equipment company struggling to keep up.' Further advances are projected, particularly in exports.

'Together with factored goods, the new ventilator has been our salvation,' declares Derek Edridge, another long-standing employee and working director not related to the owning family. For SLE has a third leg, which consists of representing some half-dozen overseas makers of medical hardware, including several Americans and at least one Italian, and of software, too. The most notable of the foreign principals is a US producer of computer-based diagnostics equipment in the neurophysiological field. That's quite close to the company's own interest in EEG. Agency sales, according to Denis Nelligan, account for about a quarter of turnover.

Representing foreign suppliers is nothing new to SLE; it's almost where the company came in. It was formed in the mid-1950s when Denis Nelligan, a tiny, sharp-witted south Londoner, now 66, went into business manufacturing and selling electrodes - the parts they attach to your head when wiring you up to an encephalograph - and other accessories. A former medical technician, Nelligan started work as an apprentice surgical instrument maker just before the war, then learned about electronics in the RAF: his first electrodes were produced, in classic entrepreneurial style, on the kitchen table.

After a dozen or so years, for most of which the payroll numbered about eight, there was a sudden accretion of volume on the accessories front. For the princely sum of £6,500 the company acquired a medical bits-and- pieces business from AEI, which had elected to leave the field. Only shortly before, SLE had begun assembling - and partially manufacturing - complete EEG machines for the UK market under licence from an Italian company.

Expansion meant relocation: from the Victorian house with an engineering shop out at the back, to the present factory in an unexpected yard surrounded by mile upon mile of Mr Pooterish villas. The double-span shed, which has had so many additions that it looks like a gothic film set, is crammed with hardware. There is scarcely space for a managerial desk. Yet almost everything is produced here.

The leaking roof is due to storm damage. Yet this uninspiring setting has been home to half the workforce for around 20 years. Edridge and Donovan are not unusual: SLE has a very stable working population. The factory has been an important source of commercial stability. Had Nelligan not bought the freehold back in 1970, the company's position might have been far more precarious of recent years.

Early in the 1970s, the Italians came out with a new model, all bells and whistles at a very fancy price. Denis Nelligan was appalled and the Italians were amicably dumped. SLE set about developing a product of its own, for which it could ask about £7,500 as opposed to three times that figure. (Even today the products cost only some £13,500.). SLE's original encephalograph was unashamedly copied from the American market leader of the day. The '70s were drawing to a close when the company launched a machine that was truly its own.

For a while, Denis Nelligan dreamed of becoming a world supplier of EEG machines, of SLE emerging 'as an AEI'. 'It was not to be,' he adds without bitterness. Through its agents the company has sold machines overseas: to the Middle East, to India, to Portugal. But it has evidently been uphill work - 'We have four machines in Scandinavia'. Electro-encephalography is a sector of med-electronics dominated by the Japanese.

SLE's latest encephalographs - the third generation - are claimed to possess features which put them ahead of the competition They are safe to use even with the brain exposed, as for surgery. 'The Japanese still don't have that,' boasts Nelligan. Moreover, being fully digital, they can be used for 'evoked potential' testing - bringing out measurable signals from minute impulses - which is diagnostically more useful than an EEG. (Evoked potential is a speciality of Bio-logic Systems, one of SLE's important US principals.). But the latest SLE machines are also said to have arrived 'half a generation too late'. Bad timing has serious repercussions, especially in a weak market.

Although newer techniques - NMR imaging as well as evoked potential - have walked off with some of the funds that it might otherwise have attracted, EEG is by no means an outdated tool. Imaging gives additional data, not alternative data; geographical rather than physiological. It may reveal damage but, as Bernard Nelligan cheerfully observes, an EEG is really the only way to prove brain death. The market may have shrunk but it is not likely to disappear in the near future. However the combination of an impoverished and crisis torn health service in the UK, local manufacturers in certain major markets overseas, and rampaging Japanese competitors everywhere, does not add up to a happy outlook for SLE.

At least the company is not (yet) up against the Japanese on the ventilator side. This dates from the mid-1970s when management (which is to say Denis Nelligan) decided that it should not longer have all its eggs in one basket. Thus SLE took on the agency for an American- made infant ventilator. 'We were very successful at selling and maintaining it,' says Nelligan. So much so that the Americans set up in the UK. It was like the Italian EEG machine all over again: 'That incensed me so much that we rapidly developed our own product.' The Americans withdraw from the market soon after.

Like the EEG machine, SLE's infant ventilator went through successive model changes - and fluctuating fortunes. But the business was all too obviously collapsing when representatives of the postgraduate medical school at Hammersmith came knocking on the door. Then, 18 months before the new product was launched, the little company suffered a terrible blow when its managing director, Denis Nelligan's son Richard, was killed.

Having ruled the company absolutely for most of 35 years, the father had reached a reasonable retirement age and was trying to create space for his successor. It was Richard Nelligan who was driving forward the licence deal with the medical school, for example. Denis Nelligan picked up the reins again and summoned back his youngest son, Bernard. Fortunately the latter knew something about the medical field, having worked for the company in the past - as well as for the NHS. Bernard Nelligan became managing director, aged 31, in August.

He has at least taken over at a propitiouS moment. SLE has 'never had such a strong product' as the infant ventilator. There is now talk of a US company producing it for the American market. At home the search is on for a bigger factory. But the Nelligans know that the window of opportunity will close again unless they move fast. They are expecting the competition to come after them, so there are already plans for an improved infant ventilator, also for an adult model. Since there's no intention of changing the company's private status, these developments will have to be financed mainly out of profits. But so what? SLE is used to being highly profitable.

Bernard Nelligan suggests that there's no incompatibility between a family and a high tech company. He also talks about increasing the number of SLEs market niches from two (or two-and-a-half, including factored products) to around five. Maybe that's looking ahead too far. He's going to have his work cut out to defend the territory won during the past, extraordinary, couple of years.

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