KEY EXECUTIVES:
Dr. h.c. mult. Hansjörg Wyss, Board Chairman
Michel Orsinger, President and CEO
Robert Donohue, Chief Financial Officer
Ciro Römer, President, Europe, Middle East and Africa &Global Operations
NO. OF EMPLOYEES: 11,426
GLOBAL HEADQUARTERS: West Chester, Pa.
Talk about apropos. The management team at Synthes Inc. couldn’t have picked a more fitting moniker for 2010, known internally as The Year of Challenges and Change. The challenges—not surprisingly—were triggered by several longstanding industry nemeses, namely: pricing pressures, shrinking reimbursement rates, a confusing and contradictory regulatory process, weak procedure demand, and an economy that to some extent, is still smoldering from four years of charred capital.
The second half of the nickname is rather self-explanatory, representative of all the changes that occurred at the Swiss surgical implant manufacturer last year as a result of the challenges that confronted the firm. Those challenges, for the most part, helped position the company for perhaps the most significant change in its 52-year history—becoming part of the Johnson & Johnson corporate family. The healthcare conglomerate purchased Synthes in late April (2011) for $21.3 billion to gain a majority of the estimated $5.5 billion trauma device market. The deal—the largest in J&J’s 125-year history—gives the New Brunswick, N.J.-headquartered firm a device company with an operating margin of 35 percent, the highest among medical-products manufacturers with stock values of more than $5 billion.
The purchase values Synthes at about 11.2 times this year’s forecast earnings before interest, tax, depreciation and amortization, according to Bloomberg data. Buyers of medical products companies paid a median of 11.5 times profit in the past five years, the data show.
The deal, expected to close in the first half of 2012, is subject to antitrust review in both the United States and European Union, and requires the approval of Synthes shareholders. J&J plans to combine Synthes with its DePuy unit to form the largest part of its medical devices and diagnostics segment, the companies said.
With 50 percent of the market for sales of screws, plates, bone grafts and other products to treat skeletal injuries as well as “scale and margins,” analysts believe the blockbuster acquisition will complement J&J’s orthopedics business. J&J executives agree. “Very infrequently do you ever see an opportunity for a company like Synthes to come into play with J&J,” Johnson & Johnson CEO William J. Weldon said. “We thought this was an extraordinary opportunity and the time was right.”
Technically, the timing of the deal was somewhat off, occurring nearly five months too late to qualify for The Year of Challenges and Change. Such a blockbuster move, however, most likely is better off in its own category anyway (J&J’s Comeback Year, perhaps?) to keep it from overshadowing the various changes Synthes implemented last year to improve its bottom line by 8.6 percent.
One of those changes included the November acquisition of The Anspach Effort Inc., a privately held surgical tools manufacturer based in Palm Beach Gardens, Fla. Executives said Anspach’s focus on high-speed surgical power tools for neurosurgery, spinal, and ear, nose and throat procedures will help Synthes expand its power tools product offering to hospitals and surgeons. The deal also will help the firm gain market share.
Another notable change at Synthes that resulted from various industry challenges was the creation of the Thorax product segment, which has become the company’s fourth-largest portfolio in the Craniomaxillofacial (CMF) group (behind Neuro, Midface and Mandible). The Thorax portfolio includes sternal closure devices used to fix the sternum after open heart surgeries, and a plating system to fix rib fractures.
Synthes attempted to offset some of the negative growth in its spinal business last year with the launch of two new products—the Matrix Spine System and T-Pal Spacer System. The company describes its Matrix product as a pedicle screw fixation system for the lumbar spine that can be used in both open and minimally invasive procedures to fix deformities, relieve lower back pain and repair traumatic injuries. Synthes debuted the Matrix device in the United States in November.
The T-Pal system is a “kidney bean” style implant for use in minimally invasive transforaminal lumbar interbody fusion surgery. The device is, in effect, a “placeholder” for disc space once a diseased disc is removed, according to product literature.
A string of new CMF and trauma products helped Synthes maintain is market-leading position in both sectors last year. The Matrix Plating Systems, MatrixRIB System and MatrixORTHOGNA-THIC Plating System (a reconstruction system used to correct dental misalignments) drove CMF device sales growth, while the launch of more than 30 new Trauma products contributed to higher 2010 sales in that device group. Most of the new Trauma devices released last year were expansions of the company’s locking compression plate product lines, which now come with various screw angles to simplify placement, according to the company’s 2010 annual report. Synthes also debuted a large set of implants and instruments for orthopedic foot interventions called the Variable Angle LCP Forefoot/Midfoot system, a product line that increases offerings to foot and ankle surgeons.
Product initiatives, however, were not the only strategies Synthes employed to boost its market presence last year. The company launched its first iPhone and iPad application featuring product technique guides, surgical approach videos, and presentations. The iPhone and iPad application is designed to address the needs of surgeons and help sales representatives improve their performance.
Synthes also introduced a new Global Learning Management System, an initiative designed to improve the firm’s quality training system. Company executives said the Global Learning Management System provides 24-hour access to the firm’s library of soft skills and systems training curriculum and “supports the transfer of Synthes knowledge and technology around the world.”
Of all the strides Synthes made last year to enhance its ethics and compliance program (the Global Learning Management System was one of them), none were as significant as the sale of its Norian Corp. unit. The company sold the unit to settle criminal allegations that it illegally tested a bone-mending cement which caused the deaths of three patients. Under terms of the settlement, Norian pleaded guilty to a felony, was ordered to pay a $23.5 million fine, and faces exclusion from Medicare, the government’s health plan for the elderly and disabled.
The divestiture marked the first time the U.S. government ordered a medical device maker to sell a subsidiary in a health-fraud case, Gregory Demske, assistant inspector general for legal affairs with the U.S. Department of Health and Human Services, told Bloomberg.
In court papers, federal prosecutors accused Norian of conspiring to conduct unauthorized clinical trials of Norian-brand cements from May 2002 to late 2004. Three patients died from a rapid drop in blood pressure during surgeries, prosecutors said.
Synthes, separately, was ordered to pay $808,000 as part of the settlement. Company executives, however, said the settlement would not have “any significant financial impact” on the firm’s 2010 earnings.
They were right. Net sales reached $3.7 billion last year and gross profit jumped 8.7 percent to $3 billion, according to the company’s 2010 annual report. Net earnings climbed 10.1 percent to $907,733, while basic and diluted earnings per share increased 10.2 percent to $7.65. “2010 was a year full of challenges and change for both our industry and our company,” Board Chairman Hansjörg Wyss and President and CEO Michel Orsinger said in a letter to shareholders within the company’s annual report. “In that context, Synthes’ performance and the progress made in most key financial metrics as well as in all major operational activities and all parts of the world are evidence of the strength and resilience of our company.”
The Middle East and Africa best demonstrated that resiliency in fiscal 2010 (year ended Dec. 31), as sales grew an astonishing 50 percent. Executives attributed the sales increase to a large tender bulk order from the Saudi Arabian government, made bi-annually on behalf of government-owned hospitals.
Severe winter weather in Europe helped drive a 10.5 percent increase in sales to $850.2 million, while overall revenue in the Asia/Pacific region climbed at a similar rate, growing 10.3 percent to $424.4 million. The lion’s share of the company’s Asia/Pacific business came from Japan, which comprised 40 percent of the total revenue last year. Australia and New Zealand customers made up an additional 20 percent of sales.
Latin American sales growth came in at 14.6 percent on a constant currency basis, with Brazil and Mexico performing particularly well last year. North America recorded the lowest sales growth but nevertheless garnered the most revenue for the company. The $2.1 billion in North American sales comprised nearly 60 percent of the company’s total revenue for the year.