KEY EXECUTIVES:
David C. Dvorak, President and CEO
Cheryl R. Blanchard, Ph.D., Sr. VP and Chief Scientific Officer
James T. Crines, Exec. VP, Finance, and Chief Financial Officer
Derek M. Davis, VP, Finance, Corporate Controller and Chief Accounting Officer
Jeffery A. McCaulley, President, Zimmer Reconstructive
Bruno A. Melzi, Chairman, Europe, Middle East and Africa
Stephen H.L. Ooi, President, Asia Pacific
Jeffrey B. Paulsen, Group President, Global Businesses
Chad F. Phipps, Sr. VP, General Counsel and Secretary
NO. OF EMPLOYEES: 8,800
GLOBAL HEADQUARTERS: Warsaw, Ind.
“The ambitions we have will become the stories we live.”
— Donald Miller, “A Million Miles in A Thousand Years”
Zimmer Holdings Inc. has been living the same basic story for more than 80 years, virtually since the night its founder, Justin O. Zimmer, returned home from selling splints and decided to start his own manufacturing company. Like other large medical firms, Zimmer’s story is based on a single, yet powerful motivator: giving healthcare professionals the tools they need to help patients reclaim active and productive lives.
Over the last three years, however, Zimmer’s colorful story arc appears to have stalled. While it still is driven by the same ambition, the company’s financial performance seems to have hit a plateau since the start of the Great Recession in 2008. Though they might never admit it, Zimmer executives may very well be experiencing a sentiment perhaps best expressed by Donald Miller in his 2009 novel, “A Million Miles in A Thousand Years.” In the book, Miller recounts his personal journey in resolving both his creative and spiritual funk:
“The reward you get from a story is always less than you thought it would be, and the work is harder than you imagined…The shore behind you stops getting smaller, and you paddle and wonder why the same strokes used to move you but they don’t anymore.”
The strokes Zimmer traditionally has used to propel itself past competitors appear to have lost their efficacy as of late. Increased research and development spending and new product introductions—two of the most common growth strategies implemented by the Warsaw, Ind.-based company in recent years—no longer are producing double-digit sales hikes or considerable upturns in operating profit. Last year, for example, the company upped R&D spending by 7 percent and launched a bevy of new products, but sales grew only by 3 percent, or $125 million, and operating profit rose by $49 million, or 4 percent. Earlier in the decade, when Zimmer employed the same growth strategy, sales and operating profit ballooned by as much as 57 percent and 55 percent, respectively (such explosive growth occurred between 2003 and 2004).
One of the most obvious reasons for the sharp decline in sales growth and operating profit is the economic instability of the last few years. That volatility has forced patients to re-evaluate and often delay cosmetic procedures such as breast implants, elective dental surgeries, and in some cases, hip and knee replacements.
“Globally, economic conditions remained challenging throughout the year, characterized by high rates of unemployment in a number of key markets,” Zimmer President and CEO David Dvorak told stockholders in a letter included in the company’s 2010 annual report. “These factors contributed to a significant number of patients delaying implant and dental surgeries in 2010. However, as the year drew to a close, surgery schedules began to stabilize and we expect procedure demand to continue to perform in line with the global economic recovery and growth.”
Surgical procedure volume, however, is not the only culprit behind the company’s anemic growth rates. Ongoing challenges in reimbursement and pricing also have impacted sales. Global selling prices, for instance, fell 1 percent last year, but were flat in Europe. Consequently, European sales were off by 2 percent in 2010, year ended Dec. 31. Similarly, selling prices slipped 2 percent in the Asia Pacific region, which encompasses Australia, New Zealand, Korea, China, Taiwan, India, Thailand, Singapore, Hong Kong, Malaysia and Japan. Pricing in this region particularly was affected by a bi-annual pricing adjustment in Japan that became effective on April 1, 2010. As a result, operating profit in the region essentially was flat at $259.9 million. Executives do not expect prices to improve anytime soon; therefore, they anticipate selling prices to negatively impact Zimmer’s 2011 sales by 1-2 percent.
Dvorak, though, is confident that the company’s product pipeline can offset global pricing pressures and boost the company’s bottom line. “Throughout [2010], we introduced a range of new offerings across our musculoskeletal portfolios,” he noted in the annual report. “These offerings continue our strong tradition of innovation. Moving into 2011, our positive momentum in the sales of these new products provides a strong platform for growth.”
That platform helped push sales to a record $4.2 billion last year and diluted earnings per share to $4.33. Net earnings plummeted 17 percent to $596.9 million, but operating profit totaled $1.2 billion and operating cash flow came in at $1.2 billion, a 7 percent increase compared with the $1.1 billion in operating cash flow the company reported in 2009.
Reconstructive product sales garnered the most revenue for Zimmer last year, comprising three-quarters of the company’s total net sales. Hip, knee and extremities devices generated $3.2 billion in sales, a 3 percent increase compared with the $3.1 billion these products earned for Zimmer in 2009.
Knee implant sales were driven by the popularity o f gender-specific devices and the NexGen Complete Knee Solution product line, including Gender Solutions Knee Femoral implants, the NexGen LPS-Flex Knee and the NexGen CR-Flex Knee, a synthetic device introduced in 2003 that surgeons use to cap the femur to the tibia at the knee. Sales of partial knee devices also contributed to the 2 percent growth in this product category (revenue totaled $1.79 billion).
Hip sales rebounded last year, growing 3 percent to $1.26 billion. Sales drivers included the M/L Taper Stem, the M/L Taper Stem with Kinective technology, the CLS Spotorno Stem from the CLS Hip System and the Alloclassic Zweymüller Stem, a cementless hip used in more than 325,000 replacement surgeries worldwide. Sales of revision hip products such as the ZMR Hip System, the Trabecular Metal Revision Shell and augment cups as well as Fitmore Hip Stems also experienced solid gains, though the company’s Continuum Acetabular System and its M/L Taper Stem with Kinective technology were the top revenue-generators. The Continuum Cup combines several of Zimmer's hip technologies—Trabecular Metal technology, Metasul Metal-on-Metal technology, BIOLOX delta and Longevity highly crosslinked polyethylene. The Continuum Cup gives surgeons the option of choosing between metal or highly crosslinked polyethylene bearing surfaces, and metal or ceramic heads to match various patient lifestyles.
Sales of extremities products surged 11 percent in 2010 to $150 million. The top sellers in this category were the Bigliani/Flatow Complete Shoulder Solution and the Trabecular Metal Reverse Shoulder System, according to the annual report.
Dental product sales experienced a significant turnaround from a 10 percent loss in 2009, growing 7 percent last year to generate $219 million for Zimmer. Sales were led by the 10-year-old Tapered Screw-Vent implant system, a device that features an internal hex platform which reduces stress on crestal bone and resists abutment screw loosening, helping to create ideal conditions for bone level maintenance.
Trauma product sales rose 5 percent to $246 million, driven by demand for Zimmer Periarticular Locking Plates, the ITST Intertrochanteri/Subtrochanteric Fixation System and the Natural Nail System, a next generation system of intramedullary nailsdesigned to restore the pre-injury shape of fractured long bones and provide stable fixation during fracture healing.The nails feature a unique screw nail connection that allows a surgeon to create a true fixed angle construct that unites the injured bone to the nail.
Spinal product sales fell 8 percent to $234 million, as the initial benefits of Zimmer’s 2008 acquisition of Abbott Spine wore off. A decline in Dynesys System sales also affected revenue, though that decrease was somewhat offset by solid sales of the PathFinder NXT Minimally Invasive and Sequoia Pedicle Screw Systems, the company’s Universal Clamp System and its Trinica Anterior Cervical Plate System. Zimmer’s PathFinder screw system allows surgeons to approach the implant site through a miniature opening or percutaneously.
Orthopedic Surgical product sales experienced the highest growth last year, surging 13 percent to $319 million. Sales stalwarts in this category included the company’s Palacos bone cement, wound debridement products, tourniquet devices and powered instruments.
Sales in the Orthopedic Surgical product category most likely will receive a boost this year from a pair of acquisitions that occurred in late December. Shortly before Christmas, Zimmer announced the purchases of Beijing Montagne Medical Device Co. Ltd. and Sodem Diffusion S.A., a Swiss manufacturer of SoPlus Orthopaedic Surgical Power Tools. Executives said the deals will broaden the company’s portfolio of surgical power tools and strengthen its position in the estimated $1 billion surgical power tool market.