Biomet's Rebirth?

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Medical Devices / Orthopedics Biomet’s Rebirth? This once “surreally stable” company has been through more hoops than an army of circus animals. Will its new owners bring renewed stability? Or more flux?

david cassak

Big Pharma’s Year of Big Layoffs • Medtronic: Ready to Deal Again Medical Devices / Orthopedics

Biomet’s Rebirth? This once “surreally stable” company has been through more hoops than an army of circus animals. Will its new owners bring renewed stability? Or more flux?

by David Cassak ■ Once one of the most stable of orthopedics companies, Biomet hit a bad patch 18 months ago, as its stock price tanked and its board and long-time CEO became embroiled in a public dispute. ■ To the rescue has come a number of private equity funds, including some of the largest in the business, Texas Pacific Group , Kohlberg Kravis Roberts, Gold- man Sachs, and Blackstone Group, which have agreed on a deal that would make Biomet one of the biggest private equity deals in history. ■ No one really knows how Biomet will be different as a newly private company with deep-pocketed investors. But one competitor, in particular, has been rais- ing concerns about the changes Biomet will almost necessarily face. ■ Biomet doesn’t deny that there will be changes. Top of the agenda: improving some back-office functions and building on its spine and trauma businesses, where, the company feels, its products are strong, but it trails competitors’ growth rates. Executive Summary >> 100 ■ But, the company insists, it will grow based on the same fundamental principles that made Biomet such a strong performer just a few years ago: rapid product interation, strong surgeon relationships, and close distributor ties.

or more than 20 years, in an orthopedics segment that is companies dabbled in direct distribution, in an effort to break easily one of the most conservative precincts of the device the powerful hold distributors had on their surgeon customers; Findustry, Warsaw, Indiana-based Biomet Inc. seemed to others responded, albeit tentatively, when national hospital epitomize conservatism itself. Founded in 1977 by four men, buying groups asked for group contracts and price discounts, each of whom had previously worked in orthopedics, including a strategy that implicitly challenged the absolute faith in the long-time CEO Dane Miller, Biomet, like other companies in the surgeon as ultimate decision maker. Finally, many began to industry, built itself during the boom times of the 1980s on the tinker with product lines, offering generic hip and knee re- back of the fundamental success drivers of the industry: constant placement products that would seem to speak to a concern technology iteration, strong surgeon relationships, and close that price and margin pressure on this most robust of device relationships with independent distributors. segments would prove to be real. But as the industry’s explosive growth began to slow in the Direct distribution and group contracting never really 1990s, many orthopedics executives began to question, some became industry norms in the 1990s. And how real price explicitly, some implicitly, the relevance of these fundamental and profit pressures were was a matter of some debate, but drivers. Biomet almost alone seemed to hold its course. Some something clearly was going on. Long-time market leaders,

most notably Zimmer Holdings Inc. and Howmedica (now part Boston Scientific Corp. How completely in keeping with of Stryker Corp.), were quickly losing market share, turning Biomet’s world-turned-upside-down, then, was the fact that the industry into a crowded, fragmented arena, with nearly a the company’s endgame became a buyout, in a deal valued at dozen companies bunched between, say, 6% and 19% share. around $11 billion, by a group of leading private equity firms, In response to the new pressures, companies struggled to including The Blackstone Group, TPG, Kohlberg Kravis Roberts find new winning strategies. Pharma companies that once (KKR), and Goldman Sachs. (After an initial bid of $44 a share held substantial stakes in the industry, including Roche (with last December, the investors raised their offer to $46, a 32% DePuy Inc.), Pfizer Inc. (with Howmedica), and Bristol-Myers premium over Biomet’s $34 share price just prior to rumors Squibb Co. (Zimmer), either spun out or sold off their hold- of the impending offer.) ings (driven, without question, by considerations other than Though the acquisition by Blackstone, TPG, KKR, and Gold- simply the dynamics of the orthopedics marketplace.) In man Sachs hasn’t yet closed, things are already looking up for turn, and perhaps most significantly, in the late 1990s, the Biomet. In February of 2007, the company hired a new CEO, industry went through a burst of consolidation as a number Jeff Binder, and, buoyed by the news of the private equity of orthopedics companies, most notably Stryker and Johnson buyout, Biomet’s shares have already begun to recover. In the & Johnson, made large, somewhat risky moves to buy much past year, shares have gone from a low of $32 to nearly $46 larger competitors—in Stryker’s case, Howmedica, in J&J’s, (though largely in response to the offer by the new investors), DePuy—seeking to build critical mass, even as they took on and this once reeling company seems stable again. Now with large integration challenges. a new CEO and, imminently, a new set of owners and a newly even companies that didn’t pull off major deals tried to get private status, the question is, how, if at all, will the new Biomet into the game—at different times following Stryker’s and J&J’s differ from the stalwart it had always been? moves, rumors floated that Smith & Nephew PLC, Zimmer, and Centerpulse were all, at one time or another, interested in A Likely Choice? buying one of the other two. (Eventually, in 2003, Zimmer did In many respects, Jeff Binder was, at once, the most obvi- acquire Centerpulse. ) Over that time, only Biomet seemed to ous and least likely choice to step into the breach left by Dane reject the strategies that other companies contemplated and/ Miller’s departure. (Though it is typical of private equity firms or pursued. (See “Biomet’s Contrarian Conservatism,” IN VIVO, to replace senior management after making an investment, the May 1999.) How surprising, then, it was to see the turmoil that hiring of Binder was done by Biomet’s board. The private equity surrounded this most stable member of the fraternity early in investment won’t close until this fall, though Binder’s hiring had 2006. the full support of Biomet’s prospective new owners.) For much of the previous decade, Biomet’s stock perfor- A long-time orthopedics industry veteran, with senior execu- mance had been remarkable—a strong play in a strong sector. tive stints, first at Howmedica and then at DePuy, Binder joined Like other orthopedics companies, Biomet’s shares skyrocketed spine start-up Spinal Concepts (now Abbott Spine) in 2000 in the late 1990s and first half of this decade. From $15 a and led the company to a successful acquisition by Abbott share in mid 1997, Biomet’s stock had risen virtually without Laboratories Inc. in 2003. (See “Spinal Concepts: Leading Ab- retreat, to a high of around $44 in January 2005, with a couple bott into the Spine Market,” IN VIVO, July/August 2004.) Soon of three for two stock splits over that time. (Stryker’s stock, after the acquisition, Abbott tapped Binder for a larger role in by comparison, had similarly risen 475% over somewhat the its growing device business, and he was named head of the same period.) But 2005 was a different story: by the spring company’s flagship in vitro diagnostics business. of 2006, Biomet’s stock had lost nearly one-fourth of its value, Though his experience had been almost exclusively in or- dropping to around $34. (See “Biomet Deal Opens Door for PE thopedics (he worked for a while at a leading management Buyers,” IN VIVO, January 2007.) consulting firm), Binder confesses that the opportunity to The fact that other orthopedic stocks had suffered similar move on—and up—in Abbott had great appeal. “I was really fates didn’t seem to matter. (Indeed, over the past five years, interested in doing something on a larger scale, and [Abbott] Biomet’s stock has tracked pretty closely those of other pure offered me the opportunity to come up to Chicago and run play orthopedics companies.) (See exhibit 1.) By early 2006, Abbott Diagnostics,” he recalls. The fact that he was being Biomet was in turmoil: co-founder Dane Miller, whose tenure offered an opportunity to run what was, arguably, Abbott’s as CEO and identification with his company rivaled that of flagship device franchise and the one that had launched the Stryker’s John Brown, precipitously resigned from the company careers of executives such as CEO Miles White and COO Rick in late March—some said at the insistence of the board—and Gonzalez “wasn’t lost on me,” Binder goes on. In fact, so was replaced by Dan Hann, the company’s former general immersed was Binder in his new responsibilities heading the counsel, who was named interim CEO. Soon after, the board diagnostics business that, he says, he really wasn’t following all but put up a “For Sale” sign on the company’s front yard what was happening at his old rival Biomet. “I had my head when it announced, in early April 2006, its intention “to ex- down in my new job and that was taking all of my energy,” plore strategic options.” he says. Suddenly this most stalwart of orthopedics companies was itself reeling. Rumors flew that Biomet would quickly be The Soul of a Small Company snatched up, with all of the usual suspects, including Smith In January 2006, Binder was focused on Abbott’s diagnostic & Nephew and Zimmer, identified as prospective acquirers, business, not Biomet, and he says he really can’t comment on as well as several others, such as Medtronic Inc. and even whether Miller resigned or was forced to resign. But, he adds,

“it’s more than fair to say that Dane and the board wound up he was the right person to head the company, independent somewhat out of synch on the direction of the company” and of whether the private takeout took place. In effect, though that “there was some degree of conflict between Dane and agreed upon by the private equity investors, Binder was hired the board.” by the board to run a public company. And to Binder, it was As noted, Biomet was far from alone in the struggles it faced all the same. “I’d have been interested in becoming the CEO in 2004 and 2005. Virtually all of the leading orthopedics of Biomet whether it were a public company or a private companies saw their stock prices decline during that time as company,” he says. investors began to grow skittish over concerns of softening If the chance to spread his wings and climb higher at Abbott prices, a series of Department of Justice subpoenas investigat- was intriguing, so was the Biomet offer, says Binder. Part of his ing sales and marketing practices, and a general concern that decision lay in his fascination with the basic dynamics of the perhaps the sector had peaked, given its tremendous run-up orthopedics industry. “The challenge of satisfying the needs over the previous half decade. But Biomet also faced challenges of highly demanding surgeons, developing new technology to of its own—in particular, a deteriorating performance by its make patients’ lives better, the strong relationships you build East Coast EBI business, now Biomet Trauma and Spine, which where you know your customers so intimately,” he says. “I’ve was reportedly much of the source of disagreement between just always loved orthopedics.” Miller and the board. “I have nothing but fond memories of my time at Abbott,” Whatever the reason, a company that Binder calls “almost Binder goes on. But the opportunity to run Biomet was too surreally stable” and “the most conservative and most con- good to pass up. Indeed, in several respects, Biomet offered stant” company in orthopedics had been knocked off its bear- an especially intriguing opportunity. For all of the time that ings. “This was a very, very stable environment, and suddenly Binder had served in orthopedics, which started in 1992, Bi- it’s hit by two shock waves back to back: the change in leader- omet “had been a very successful company that had done so ship and a potential change in ownership,” he recalls. “All of many things well,” he says. Yet clearly, behind the turmoil, which made for a very difficult year” for Biomet employees, there were issue and problems—“there were clearly things we distributors, and surgeon customers, says Binder. could do to build on that foundation,” he goes on. Moreover, After signing the merger agreement with Biomet, the in- Binder, who had successfully run big companies, such as DePuy, vestors contacted Binder to see if he would be interested in and small start-ups, like Spinal Concepts, saw in Biomet an op- taking over as CEO. (For a while, rumors surfaced that the portunity to combine both experiences. He calls Biomet “a big investors would bring back Dane Miller to run the company.) company with the soul of a small, entrepreneurial company.” Biomet’s board, too, realized the company would need a full- It was, he says, the challenge he faced running Spinal Concepts time CEO--one the new investors could agree on—and it had just after its takeover by Abbott: “How do you stay responsive already begun the process of hiring a full-time CEO to replace and entrepreneurial, while putting in place all the infrastructure its interim chief before the deal was announced. The Biomet and processes of a mature company?” he asks. “How do you board hired Binder before the deal closed, concluding that retain the soul of a small company but get big?”

Exhibit 1 The Biggest Deal Leading Orthopedics Stocks: 2002-2007 In fact, Binder says that when he walked into Bi- omet’s headquarters soon after agreeing to be the new CEO, “it struck me, ‘My gosh, this is a grown- up Spinal Concepts’—a big family company, and I just loved that feel.” The final piece, for Binder, was the private equity compo- nent—taking an $11 billion company private with the resources, both financial and intellectual, of some of the leading names in private equity today. “The prospect of working with some very smart, very successful investors to help build Biomet just seemed like a great opportunity,” Source: Yahoo! Finance says Binder. But if the opportunity to

build Biomet as a large company with the huge resources of Favorable demographics benefit all device segments. But or- private equity backers and the operational and strategic free- thopedics is particularly sensitive to aging populations because dom of a start-up was compelling, Binder was also inheriting musculoskeletal problems increase exponentially as people a company with some baggage. First and foremost, was the grow older. Just as importantly, over the past several years, company’s lagging performance, particularly in its spine and orthopedic companies have adopted strategies to extend their trauma businesses. reach to younger patients as well as older ones. New tech- Then, too, there was the prospect of following Dane nologies such as hip resurfacing and implants with improved Miller, who despite his departure still loomed large over the wear characteristics and new techniques such as minimally company and had, as mentioned, been so intimately identi- invasive surgery have helped orthopedic companies expand fied with Biomet’s past success. Binder notes that Miller will their patient base in two directions, giving the industry what join a privately held Biomet as a director on the board, add- many call a doubly positive effect from demographics. ing “knowing that he wanted to play a role going forward In addition, orthopedics is, as noted, an extremely stable and will be a director meant a lot to me.” Still, Binder says industry segment. Biomet may have been known as the most that “of course it’s daunting” to follow someone like Miller, conservative of companies, but it is so in an industry that is the given his track record, though he dismisses the notion that very model of conservatism. The same basic principles drive Miller could become a distraction to or an interference in his success through good times and bad: incremental technology (Binder’s) authority at Biomet. “I’ve always considered Dane innovation, strong networks of independent distributors, and to be one of the greatest leaders and pioneers in the history close relationships with surgeons who exercise enormous pre- of orthopedics, and I’ve admired Biomet as a competitor,” he rogative in product selections. Experiments in the past with says. “I had only met him once or twice and didn’t know him innovations such as direct distribution more often than not, as all that well. But I had an instinct that we would get along noted, proved short-lived; at the same time, notwithstanding well and we have over the past couple of months.” initiatives in things like direct-to-consumer advertising and Binder insists that Miller will be a huge resource for Biomet, gender-based implants, most orthopedic executives attribute particularly given his history of strong relationships with Bi- their success to the same, traditional factors. omet’s surgeon customers and distributors. “He’s always been Indeed, one could debate what role technological inno- very good at bringing together surgeons and soliciting their vation, as opposed to incremental enhancements, plays in advice and counsel, and I see him doing more of that,” he says. orthopedics, but it is generally true, particularly in total joint In short, he says of Miller’s future role with the company, “He’s replacement, that the industry has seen few disruptive tech- a terrific guy, and I’m really looking forward to working with nologies, such as in cardiovascular with balloon angioplasty or him.” drug-eluting stents, that have materially changed the game and But although Miller will provide some kind of continuity with put at risk companies that have played by historic rules. Thus, the old Biomet, it is the advent of Biomet’s future private equity unlike other device segments, there have been few technology owners that has fueled the most debate and raised the most or business model innovations that have turned the industry questions. Private equity plays have become an increasingly upside down. (See sidebar, Innovation in Orthopedics.) large factor in orthopedics: in just the past couple of years, Finally, orthopedics has historically been strong from a Blackstone Group has acquired Encore Medical for $870 mil- financial perspective. Again, one can debate the extent to lion, Warburg Pincus took out Tornier SA (for an undisclosed which there is price cutting, particularly in a fiercely com- amount of money), and, earlier this year, and Blackstone hold- petitive industry with much of the control at the level of local ing ReAble Therapeutics Inc. purchased DJ Orthopedics Inc. independent distributors. But despite constant concerns that for $1.6 billion. major price and margin pressure is around the corner, the The $11 billion deal for Biomet was simply the largest, then, industry has been able to charge and sustain strong pricing, in what has been a string of such investments. But it is the and that means that orthopedics companies tend to be strong particular nature and possible implications of private equity— cash generators. with its long-term perspective (compared with public companies), deep pockets, and propensity to shake things up—that A Feud Erupts has thrust Biomet into the spotlight and raised questions in For private equity firms, which look for stable companies orthopedics circles. in mature industries and like strong cash flows to support the debt burdens they take on, orthopedics is a logical industry in A Stable Industry which to invest. Asked what Biomet’s new owners saw in the It may be too much to say that there is a uniquely compat- company, Jeff Binder lists all of the things that have traditionally ible fit between orthopedics and private equity, though the made orthopedic companies strong—surgeon and distributor relative absence of private equity from other large device relationships, technology enhancements—and concludes, “I segments, such as cardiovascular, is striking. But it does seem think what they saw was a great company that had performed true that there are things specific to orthopedics that are of well and could perform even better.” particular appeal to private equity investors. For one thing, But if orthopedics is good for private equity, is private equity there are the favorable demographics, specifically, the aging good for orthopedics? In an interview in the July/August issue of the population as the baby boomer generation hits senior of IN VIVO, Stryker CEO Steve MacMillan argued, actually, yes. citizen status—as people get older, they need more care and (See “Taking Stryker Forward: An Interview with Steve MacMillan,” have more procedures performed. IN VIVO, July/August 2007.) He noted that the huge dollars the

private equity funds put at risk will likely make them disciplined dertake a massive cost-cutting campaign, including a retrench- and responsible in their efforts to grow their companies. He ment in R&D, as private equity companies have done when would, he said, have been more worried had Biomet wound up they’ve taken over companies in other industries in the past, in the hands of one of the other large orthopedics companies and to experiment with less expensive distribution strategies, which, in the name of strategic initiatives, might have tried such as direct selling. In short, Zimmer has been arguing that some riskier approaches. the introduction of private equity into this most conservative But not all leading orthopedics companies take the same of industry segments will bring tremendous disruption and optimistic view—at least publicly. Although all of orthopedics uncertainty, and as a result, Biomet will be a riskier partner is talking about the role of private equity going forward, no going forward for both surgeons and distributors. company—Biomet aside—has made it as much a topic, argu- It is, needless to say, a view Biomet strongly rejects. Jeff ably, than has Zimmer, in the process provoking something of Binder insists that going forward, whether public or privately a Hatfield-and-McCoy feud. Zimmer has for much of the past owned, orthopedics companies will succeed the way they year been calling to the attention of distributors and surgeons always have. “A strategy where you slash R&D and stop inno- what it believes will be the unfortunate consequences of the vating, where you force a major disruption in your distribution Biomet buyout—most notably, that the financial pressures network—that would be incredibly dumb,” he notes. “The Biomet will soon find itself under will force the company to un- way you succeed in this industry is through constant product

Innovation in Orthopedics: Solving Problems Over Time Shedding its former conservative ap- entiated advances. But Binder goes on, just isn’t paying attention.” Having improved proach, Biomet says it will begin to pursue because an advance is incremental, doesn’t wear properties, companies have now many of the same aggressive marketing mean it’s not important. Take advances turned to new polyethylenes to enhance campaigns that its larger orthopedics rivals that have improved wear characteristics, he the strength of the implants, “combin- are now using—including DTC advertising says. Fifteen years ago, wear was a major ing great wear characteristics with great and promotion of less-invasive surgery. problem for most orthopedics companies, strength characteristics.” Still, a note of caution creeps into Jeff some of it materials-related, some design- From there, as implants were de- Binder’s words when he adds that com- related. (Interestingly, Biomet because of signed to be stronger and last longer, panies have a responsibility to ensure that its compression-molded manufacturing orthopedic companies have looked to “the technologies they market are truly process may have faced fewer problems other advances that, although not nec- medical advances before they aggressively than others, Binder says.) essarily enhancements to the implants tout them as such.” But since the early 1990s, Binder says, themselves, have made the procedures Indeed, the whole notion of the role of important innovations have been intro- themselves better—such as minimally technology innovation in orthopedics gets duced such as metal-on-metal and highly invasive techniques or partial implants to the heart of how much and how quickly cross-linked polyethylene implants that and re-surfacing technologies—through the orthopedics industry is changing—and have greatly improved wear characteristics. less tissue disruption to provide for faster it raises something of a debate. As noted, And not only has wear been reduced, but recoveries, less blood loss, and reduced one aspect of the stability and maturity of the new materials have also allowed for pain. In addition, they’re investigating orthopedics that is appealing to private other incremental advances, such as the new coatings that may help to speed equity investors is the incremental pace of development of larger implant heads, healing and reduce infections—admit- technology change; some industry insid- which may result in fewer dislocations and tedly a small problem for total joint pa- ers insist that, things like hip resurfacing, improved range of motion, and better ap- tients, but one with terrible implications ceramic-on-ceramic hips, and MIS notwith- proaches in fixation. for the small percentage of patients who standing, orthopedics hasn’t seen a major Thus, there may not have been single, are affected. technological advance in decades. At the game-changing technology disruptions, None of these enhancements, on their same time, many senior executives believe Binder goes on, but the advances have own, would be considered disruptive in that technology advances and new prod- been real and meaningful.“Perhaps the any real sense of the term—and they pale uct development, even if only incremental, best way to think about [innovation in in comparison with advances made in, represent an important dynamic in success. orthopedics] is that we’ve solved important say, spine, including the development of (Currently, leading orthopedics companies problems sequentially and over time,” artificial discs. But that’s not to say that the spend something around 5% of sales on he says. Fixation, he notes, has long industry hasn’t seen meaningful innova- R&D, not huge compared with the cardio- been a concern, and many orthopedic tion. “It’s kind of like watching your kids vascular sector, but still significant.) companies spent the 1990s trying—and grow up,” he notes. “Because the pace of Jeff Binder says he can see both sides of largely succeeding--in improving fixation change is based on incremental improve- the debate. Total joint replacement ad- approaches. Companies then turned ments rather than substitutions, you don’t vances are clearly “incremental,” he says; their attention to wear, and, says Binder, always notice how great the changes are. spine, by contrast, has seen both more ad- “anyone who thinks we haven’t made sub- But if you look over a long period of time, vances overall and more major and differ- stantial improvements in wear over time you see a big, big difference.”

6 | September 2007 | IN VIVO: The Business & Medicine Report | ©2007 www.windhover.com Medical Devices / Orthopedics development, high service levels, and strong relationships—all Muddying the Waters the things that have always been important will continue to Binder argues that for competitors to argue that Biomet’s be important. None of that changes.” private equity investors will seek to apply the same strategies Biomet can and will, of course, take advantage of opportu- in orthopedics that other private equity investors have used nities to make its back office operations more efficient. “Are in, say, the automobile industry “is just plain silly,” he says. there economies across our various strategic business units that “They’re smart investors looking for a return on their invest- can take advantage of our global scale?” asks Binder. “Are ment and they know that you get a return in orthopedics only there things like quality programs, human resources, and our by continuing to invest in the business.” financial organization that it makes sense to harmonize? Of Still, Binder acknowledges that the campaigns launched course.” (The company also recently hired two new senior against it—and questions about private equity generally, given financial executives, including a new CFO.) But such strategies all of the stories about the topic in the popular press—have “have very little to do with the way we fundamentally compete “muddied the waters” as they’ve “spread misinformation” and in the marketplace,” he goes on, and will only provide more “attempted to speculate on what direction the company may capital for Biomet to invest in R&D and allow it to build on its take.” As a result, he says, at least some part of his time has relationships with distributors.

We’re Not in Kansas Anymore

The deal between Biomet and its new and SG&A costs down.” This means, it avers, “because the private equity in- investors hasn’t even closed, and there is, concludes, “likely eliminating many jobs vestors are usually not in it for the long understandably, a great deal of specula- and probably moving products to lower term.” tion about how, if at all, Biomet, suddenly cost manufacturing sites.” Given that, it’s no surprise that the private and backed by some of the largest Moreover, the document says, the document concludes that the idea that private equity firms, will change its poli- notion that a takeover by private equity the PE investors are “passive investors cies and strategies. No one, of course, investors will be more employee-friendly with deep pockets,” patient in their ap- can say with absolute confidence what than an acquisition by Smith & Nephew proach to the company’s turnaround, changes will come to Biomet. But at is also likely untrue. “The only way for the is also a myth. Rather, it offers, “the least one organization has been offering acquisition of Biomet to be worth doing private equity group consists of bright, its take on how its Warsaw neighbor will by the private equity group is for them to decisive, short-term investors who are fare under its new owners. generate a great amount of synergies post known as ruthless cost cutters,” and it Promising “a more complete per- acquisitions,” the document concludes. suggests that “Barbarians at the Gate,” spective on the events surrounding “Such synergies can be realized by fun- the story of the 1988 takeover of RJR Na- Biomet,”—--that is, one not put forth damentally and drastically reducing costs, bisco by, among others, KKR, “should be by Biomet alone—the organization has canceling projects, eliminating jobs, etc., required reading by everyone involved been circulating a document entitled within Biomet,” or by acquiring another in the Biomet business.” “Biomet—Myths versus Realities” among orthopedics company and integrating that The document raises other con- Biomet distributors and surgeons. “Not into Biomet to increase scale—suggesting, cerns—about an internal investigation based on any Biomet inside information,” by implication, that the PE group’s next into Biomet’s past stock option practices the document’s conclusions are “based move will be a takeover of Smith & and about the quick conclusion and solely on a review of publicly available Nephew, to create scale and economies signing of the deal, now slated for this information and observations of other of scale now unavailable to Biomet alone. fall, but almost certainly to be delayed companies that have had similar experi- Either way, it goes on, “major expense because of concerns by the SEC, it says. ence in the past.” (The organization is reductions will be required” by Biomet’s And it offers some final conclusions, believed to be a rival orthopedics com- new owners. most notably that “Big changes will pany, but at press time, the source of the Because of the cost pressures and happen at Biomet—the issue is ‘when,’ document couldn’t be verified.) inevitable R&D cuts, the document says not ‘if,’” and that distributors and sur- The document offers 10 “myths,” as that two other notions—that “distribu- geons can “expect disruptions in every it calls them, and offers corresponding tors and sales reps will continue to have aspect of [Biomet’s] business—surgeon realities. For instance, two myths concern a good stream of new products in the relationships, sales reps, distributors, current Biomet operations. Contrary to future” and “designing surgeons will voluntary employee turnover, projects, Biomet’s insistence that the current jobs continue to be involved in an expand- service levels, etc.” In the end, the docu- of Biomet employees are safe and that ing list of new product development ment notes, notwithstanding the posi- Biomet manufacturing will remain in War- projects”—are also myths. It notes tive, upbeat spin on events that Biomet saw, the document insists that “in order to that for companies under cost pressure and its investors put on the future tactics generate a good return on its investment, “a typical way to save a large sum of and direction of the company, the reality the investment group must make radical money in the short term is to cut back is “things will not be fine in the ‘Land of changes to improve Biomet margins, significantly on R$D activities,” a move Oz’ and, Yes Dorothy, you’re not in Kansas including driving manufacturing, R&D, Biomet is even more likely to adopt, it anymore.”

been spent “trying to debunk what others might assume about in ownership—if only because the new owners could change private equity.” strategies and tactics or Biomet’s long-term future might be at Of Biomet’s—and any orthopedic company’s—three main risk. A second key constituency, surgeons, might have similar constituents, it has probably been its distributors that have concerns, but clearly they don’t feel them as acutely—although raised the most concerns about the company’s new owners. surgeons like to use implants that they’re comfortable with Zimmer’s campaign about the impact of private equity was and have confidence in, it is, in many respects, a bigger thing part of a larger effort on the part of the company to lure away for a distributor to switch implants than for a surgeon. That’s distributors—not just from Biomet, but from other orthopedic why, says Binder, “that kind of message hasn’t really caused companies as well—Binder insists, adding that Zimmer even any anxiety among our customer base.” Biomet’s surgeons hired away Biomet’s former VP of sales, who, Biomet believes, use the company’s products because they like them and they was recruited specifically to target former Biomet distributors. work well, and because of the high service levels they get “We have evidence to suggest that Zimmer has spoken with from Biomet distributors. “At the end of the day, who owns the majority of our distributors and has offered to buy their the company is really an abstract issue for them,” says Binder. distributorships,” says Binder, “a trend I find really disturbing.” “As long as we continue to provide high-quality products and (In mid July, Biomet filed suit against Zimmer alleging tortious services, I don’t think our customers get very caught up in” interference, anti-competitive actions, and the misappropria- who owns the company. tion of trade secrets for a range of things, including the luring That’s not to say that Biomet isn’t reaching out to surgeons away of some distributors. And Zimmer did, in fact, recently with an education and PR campaign similar to the one it’s acquire former Biomet distributors in Kentucky, Tampa, and using with its distributors—it has, for example, sent letters to Colorado, and Biomet, in addition to filing suit against Zimmer, surgeons, signed by both Binder and Dane Miller, detailing to has also filed suit against two of the former distributors.) them the issues Biomet is having with Zimmer and its (Biomet’s) Zimmer hasn’t targeted Biomet alone; it has also purchased distributors. The letters say, in part, “We fully understand the assets of other companies’ distributors. But in Biomet’s the issues that you face—including declining reimbursements case, says Binder, “a lot of what they’ve done is to go to our and encroachments on your decision-making power—as you distributors and claim that Biomet is in turmoil, that our future attempt to practice medicine to the best of your ability, care under private equity is very bleak, that we won’t be investing for your patients, and make a reasonable living. We cannot in R&D, and that we’ll be taking our sales force direct.” Biomet see how [the distributor’s] actions or Zimmer’s are in any way also claims that in buying the distributors’ inventory of Biomet helpful to you in those pursuits or positive for our industry. The instruments, Zimmer made “a blatant attempt to disrupt our only possible end result to their scheme is wealthier distribu- service,” in an effort to make it difficult for surgeons in those tors and sales representatives, wealthier lawyers, and higher territories to continue to use Biomet implants. health care costs.” Biomet has itself responded aggressively, with its own PR Though at the end of the day they don’t really care who campaign; it’s also entered into with its distributors what it owns Biomet, Binder insists that Biomet’s customers “want to calls “thorough, long-term agreements.” And even in the see a stable and independent company.” In addition, Biomet’s three territories where Zimmer bought the assets of the Bi- surgeon customers, who tend more to be private practitioners omet distributors, Biomet responded aggressively, retaining, from local community hospitals in medium-sized communi- Binder claims, “the vast majority of the sales reps,” building ties, than surgeons from teaching institutions and academic new distributorships around them, and leaving Zimmer with centers in large metropolitan areas, may respond more to the the distributor’s assets, but not its selling clout in the local ethos or feel of Biomet’s big-company-that-acts-small nature. market. (Binder says that after initially signing with Zimmer, “What our customers want are high-quality products and the vast majority of the distributor reps in the three territories service from reps they trust,” says Binder. “That’s really what decided to continue to represent Biomet products.) they care about.” Binder concedes that retaining the reps has been costly— Distributors and surgeons are critical constituents, but Bi- Biomet has had to offer significant financial incentives to retain omet officials were concerned as well about the reaction of the the reps. But a large part of the reps’ loyalty goes back to the new ownership among a third constituency: the company’s fundamentals of the orthopedics industry. “Reps don’t really employees. And here, too, Biomet insists, the implications for want to switch their customers off the products that they’ve this group were, from the beginning, less worrisome. Because been using, products that have worked so well for them,” he Biomet’s options included both a sale to private investors or a says. Part of it, too, he insists, is that Biomet’s been able to takeover by another large orthopedic company—in the end, it make the case that the concerns about the likely tactics of the was Smith & Nephew that was the leading contender—Biomet private equity investors aren’t well-founded. “We’ve had to employees understood up front that their futures were likely do a lot of educating of our distributors and their sales forces to be more secure with the private investors, Binder notes. because we’ve got a competitor who’s out there muddying “Clearly, any time you have two large companies combine, the waters,” he says. the human impact is going to be much greater than it would with a sale to investors,” he says. “I think everyone here was An Abstract Issue much happier to see, at the end of the day, that Biomet would distributors are perhaps the most likely of Biomet’s key remain an independent company.” Moreover, although every- constituents to respond with some anxiety to Biomet’s change one recognizes there will be efforts to rationalize and centralize

selected back-office functions, “they also recognize that we’re time away from hitting the US market. And it is also bullish in a growth industry, and when companies become more pro- about minimally invasive surgery, another significant change ductive in a growth industry, you typically don’t see massive in orthopedics that wasn’t an issue seven years ago. Binder job actions,” he goes on. “We may not grow our employee notes that when he was at Spinal Concepts, minimally in- base at the same rate we increase sales, but if we grow the vasive fusion surgery was a major story in spine, and Spinal way we expect to, there will be plenty of opportunity.” For Concepts developed several important new technologies to Biomet’s existing employees, Binder concludes, the arrival of drive advances in that area. And Binder believes the trend is the new investors “ought not to be scary.” an important one for total joint replacement as well. “Anytime you can do surgery that offers less disruption to the soft tissue New Times and allows for faster, better rehabilitation, while achieving the But even if most of the charges about the effects of private same long-term results, there’s clearly a benefit for patients,” equity leveled by Biomet’s skeptics and critics are self-serving, he says. Biomet recently developed the Taperloc microplasty the underlying question remains relevant. Both for Biomet and hip stem to be utilized for an anterior supine approach with a for the orthopedics industry generally, do the traditional suc- shorter incision that will enable less-invasive surgery. And it cess factors still drive the industry? Or has the world changed has developed instrumentation to enable a less-invasive total significantly, with private equity if not a cause, perhaps, at least knee replacement as well. Says Binder, “I think any responsible a symbol or indication of a fundamentally different climate and orthopedics company today should be trying to make surgery set of rules? as minimally invasive as possible, with the least possible dis- It’s been seven years since Jeff Binder left DePuy and joined ruption to the tissues, while allowing the surgeon to preserve Biomet, and, at least in the orthopedics space dominated by to- the best possible access and visualization—all in the interest tal joint replacement, some things are different. Binder points of strong long-term results.” to one: the increasing tendency of orthopedics companies to But it’s axiomatic that private equity investors bring reach out, through direct-to-consumer (DTC) advertising and change—unlike passive investors, they put their money into the Internet, to a constituency they never focused on in the underrealized assets in an effort to turn around underper- past: the consumer. And, he argues, done properly, that’s a forming companies. And that, as Biomet’s competitors have valuable change, for all parties. “When you have a technol- noted, often includes some combination of cost-cutting and ogy that can really make a difference for a subsegment of the strategic redirection. Why, after all, if you’re a private equity patient base, educating them in such a way that helps them firm, would you put a lot of money into a company that’s have a better dialogue with their physicians can be positive,” already performing optimally? So the question remains, if he says. the essential fundamentals of the orthopedics industry remain Of course, Binder says he’s also seen companies use the new constant, as relevant in the future as they’ve been in the past, media “somewhat more cynically,” adding, “We’re medical how will Biomet be different going forward? device companies, we never want to be in the position of trying Some of the changes reflect industry-wide changes: as noted, to create a fad.” (It is interesting that orthopedics, of all device Biomet will, like most orthopedics companies, increasingly segments, has arguably done more to test the potential of new target younger as well as older patients, with a variety of new ideas like DTC advertising than any other device segment.) But technologies. And as noted, the company is experimenting Biomet itself, that most conservative of companies, will soon with new ways to reach out to consumers, particularly as its be launching what Binder calls “a significant DTC campaign” patient base grows younger, as it will in its new DTC advertis- around its line of Oxford partial knee replacements. Biomet’s ing campaigns. research shows that a fairly large number of knee replacement In addition, Binder points to other larger industry issues that candidates have arthritis in just the medial compartment of could affect the way orthopedics companies do business. One the knee; surveys of its surgeons suggest that anywhere from revolves around the current scrutiny of surgeon–product com- 15-33% of knee replacement patients are candidates for partial pany relationships—though here, Binder argues that Biomet replacements. Biomet’s campaign, to roll out this fall, will “has historically been a leader in putting in place compliance inform some patients about partial knee replacement, with systems.” The company does have consulting relationships all of the (potential) benefits of reduced pain, shorter post-op with a number of surgeons, he acknowledges. “But probably rehabilitation, and greater bone preservation, and they ought fewer than most other orthopedics companies—and where we to ask their surgeons about it. have consulting relationships, we get important information But, Binder insists, that campaign “is backed by strong and services from our consultants.” science—we have some of the best clinical data available pricing stability, too, is a concern—as it has been for much on our knee. If that enhances the patient’s dialogue with a of the past decade, though here, too, Binder doesn’t expect surgeon, that’s a good thing.” What you won’t see Biomet major changes. Prices in orthopedics have historically been engaging in, he goes on, are campaigns that “get in between stable, he notes, “and they’ve been stable because we bring the surgeon-patient relationship with information that is clini- valuable new technology to patients and the technology cally irrelevant.” works.” Rather, most of the issues Biomet will wrestle with— and much of the change the company undergoes--will be Building a Spine and Trauma Business specific to the company. Binder points to markets outside of Biomet will conduct similar campaigns around its hip re- total joint replacement, most notably trauma and spine, where surfacing technology—though that technology is still some

Biomet’s market share is closer to 3% than the 12 to 13% it Aiming for the Top Tier has in total joints. In June, Biomet brought on long-time How- Outside the US, Binder also sees opportunities. Biomet was medica and J&J/DePuy executive Glen Kashuba, to run these slower than other leading orthopedic companies in getting businesses, which are headquartered in Parsippany, NJ, and into Japan, and its 5% market share there reflects its late start. include products in orthobiologics and biomaterials, electrical Growing its Asia business represents one opportunity; so, too, stimulation devices, and bracing and soft goods products, as is building on a European business that is already “very solid,” well as spine and trauma devices. “As well as we’ve done in says Binder. “We’re growing faster than the market there.” total joints, we just haven’t been as successful in those other Long-time Biomet executive Greg Sasso now has responsibil- areas,” Binder notes. In fact, Biomet’s business has grown more ity for Japan as part of a new assignment that includes inter- slowly than the market overall in spine and trauma, leading national (Asia/Pacific, Canada, and Latin America) as well as to a slipping of its market share. “We’ve been declining in a sports medicine and microfixation. market that’s growing very quickly,” he goes on. “If we can In its core total joint business, Binder is more confident of grow even as fast as the market in those spaces, we’ll see a the company’s current offering. “I think if you lined up our substantial improvement in our performance.” product line and our distribution network against those of any And although some argue that Biomet’s failings in these other company, we’d be in the top two in terms of quality,” areas have been due, in part, to the company’s product of- he says. Binder’s challenge in total joints: “to unlock our po- ferings, Binder points here, as well, to improvements to some tential,” he says, “to figure out what’s keeping us from being of Biomet’s back-office operations as important to the turn- right up there with the market leaders.” around. He notes, for example, that Biomet has had over the Indeed, one of Binder’s messages to Biomet employees is years “significant issues with some of our IT systems.” Binder that the company should no longer settle for second-tier or concedes that the connection between lagging marketplace middle-of-the-pack performance in terms of market share. performance and sub-par IT systems isn’t obvious, but he And as part of that, he vows, people accustomed to thinking points out that Biomet has seen high sales-force turnover in of Biomet as a quiet, conservative, laid back company will be its spine and trauma business, in part because the IT systems surprised as the company begins to market itself more aggres- haven’t been able to process sales commissions properly. In sively and to rapidly expand its sales force. “It seems to me fact, Binder argues that generally, Biomet’s spine and trauma that one of the keys to Biomet’s growth in its heyday was that products are “solid, high-quality products,” though he says, it grew its sales force,” he says. “I think we can do more to try to bring to market some more Of course, Biomet’s middle-of-the-pack status is something highly differentiated products.” of an historical artifact as well: companies like Stryker and J&J Indeed, new product development is key to improving made themselves market leaders, in part, by acquiring other Biomet’s performance. And the resources of private equity companies, even if Howmedica was losing share when Stryker investors—as well as the patience that comes with being a acquired it. Zimmer, too, shored up its market position with private company rather than a public company enthralled to the Centerpulse acquisition. “I see the orthopedics industry quarterly numbers—will also help. “We need to make sure as a pizza with eight major slices,” says Binder. Ten years that the product pipeline is bringing important new products ago, Stryker and Howmedica, J&J and DePuy, Zimmer and to market,” Binder goes on. Centerpulse, each had once slice; through consolidation, they And although some product lines are more mature, others, combined their shares of the pie and, in the process, created such as sports medicine, are still relatively new for Biomet. In a top-three in orthopedics. orthobiologics, too, Biomet insists that its line of autologous Biomet—and by implication, Smith & Nephew—by re- therapy products has tremendous potential in a number of in- maining independent still have one slice each, to extend the dications, several clearances for which are pending, both within analogy. But Binder has high hopes for Biomet. “There’s no and beyond musculoskeletal applications. Still, particularly in reason in my mind why we shouldn’t be one of the top-tier areas such as spine and trauma, Binder points to operational companies,” he goes on. “One of the things we need to do issues as every bit as critical to Biomet’s improved performance is to set the expectations of this organization very high.” as product line development. For example, in managing a That said, how much Biomet can and will grow is a ques- business with as diverse a product offering as the spine and tion. Binder argues that although there are some advantages trauma group has, Biomet needs to make sure not just that it of scale in orthopedics, there are also limitations to those ad- has complete distribution networks from a geographical per- vantages and even some disadvantages, in terms of the ability spective, but that within each territory, its sales organization to respond nimbly to customer demands, when companies get is capable of selling all products equally effectively. Thus, in too large. For example, because of the importance of personal some territories, Biomet has had reps who are good at selling relationships with surgeons, Binder argues that it’s difficult electrical stimulation devices to orthopedists in their offices, but for any orthopedic company to successfully retain more than less successful selling spinal implants in the hospital. “We’re 25% of the market—having close relationships with enough doing a lot of work on our distribution network to make sure surgeons to account for, say, 35% or 50% of the market is we’re covered not just geographically, but across the various just too difficult. “I think there’s a regression to the mean in product lines,” says Binder. “I think our product lines are strong orthopedics that makes it hard to hold on to one-third market enough that if we do that well, we can substantially improve share,” says Binder, who adds parenthetically, “That’s what our performance.” makes Medtronic Sofamor Danek’s performance in spine so

impressive.” But such deals will almost certainly be smaller deals. “Do we That’s why, he goes on, smaller companies or non-market see a compelling requirement to get bigger in order to compete share leaders aren’t necessarily at a disadvantage in orthope- with the market leaders?” Binder asks. “No. If anything, it dics. All companies--large, like Stryker and Zimmer, middle- will probably be a lot less expensive for us to grow our way to tier, like Biomet and Smith & Nephew, and small companies, the top tier, particularly since we don’t see any fundamental like Wright Medical Group Inc. and Exactech Inc.--can be impediment in terms of our products or people in competing successful on their own terms “and for different reasons,” he at that level.” says. And Binder’s reading of the industry is hardly contrarian: B u t i f n o t most orthopedics industry executives play down the value of an acquirer, critical mass and the wisdom—and likelihood—of major con- might Biomet One of Binder’s solidation moves in the industry. Even the big consolidation be an acquisi- messages to Biomet moves of the past weren’t, arguably, consolidation plays per se: tion target in its Stryker and J&J, in buying much larger competitors, were less own right? Jeff employees is that the consolidating their business than leapfrogging competitors— Binder believes company should no the deals were ways of taking middle-tier orthopedic businesses that the most and transforming them into market leaders almost overnight. likely exit for Bi- longer settle for Zimmer, too, rationalized its acquisition of Centerpulse more omet down the second-tier or middle- on filling important market gaps, particularly in Europe, than road is an IPO, on the value of critical mass. a re-entry to the of-the pack performance public market. in terms of market What’s Next? Still, a takeover share. e ven Smith & Nephew officials have historically downplayed by some larger the value of large scale acquisition as a growth strategy, even company is, at though S&N has been at the heart of virtually every large least in theory, an option. Binder recalls being surprised when orthopedics deal over the past half decade. (See “Smith & Abbott Laboratories, which at the time had been primarily a Nephew’s Race to the Top,” IN VIVO, July/August 2005.) (It was pharmaceutical and in vitro diagnostics company with a small only a last minute bid from Zimmer that kept Smith & Nephew holding in cardiovascular devices, approached him about buy- from buying Centerpulse; the company was, as noted, the ing Spinal Concepts. “You never know which if any Fortune presumed acquirer of Biomet before the PE investors came 100 companies will suddenly decide they want to be in the into the picture, and it did its own large deal this year when orthopedics space,” he notes. it acquired Plus Orthopedics AG for nearly $900 million.) And Binder believes that the fundamentals of the orthopedics Biomet’s soon-to-be status as a private equity play, however, industry should remain strong over the next several years. “I casts such debates in a new light. Ten years ago, it wasn’t just think this is and will remain a very attractive space,” he says. a contrarian philosophy that kept Biomet from buying How- “The technology works and yet there’s always room for im- medica when Pfizer put its orthopedics business on the block provement. And that’s always a good combination.” or from challenging J&J when it made a bid for DePuy. Given But the very fact that the fundamentals remain so strong its size and resources, Biomet simply wasn’t in a position to buy underscores that Biomet’s challenges remain internal, rather much bigger rivals, even if it wanted to. Today, by contrast, than external. One of the main reasons Binder thinks an IPO with the backing of investors like Blackstone, KKR, TPG, and is Biomet’s most likely exit is that, if the company executes, “the Goldman Sachs, such deals would no longer be beyond the universe of companies that will be able to afford us, given the capabilities of Biomet. value we expect to build, is limited.” That includes all companies. Still, asked if Biomet might try something bold, such as a The orthopedic market leaders, in particular, he says, “would takeout of one of the company’s large orthopedics rivals, given find it very challenging” to pull off an acquisition. the resources of its new deep-pocketed owners—Jeff Binder That’s if Biomet executes. “Of course,” he adds with a smile, says no. (Some industry executives speculate that Biomet’s “if we don’t execute, we’ll be cheaper.” But at this point, no one, PE backers will make a play for Smith & Nephew in order to least of all Biomet’s new owners, are betting on that. IV drive critical mass and achieve economies of scale. “You never c o m m e n t s : Email the author: [email protected] say never,” he says. “But it’s extremely unlikely. There’s no active consolidation strategy at Biomet. Our strategy is to grow organically.” That’s not to say that Biomet won’t look to buy new technologies—particularly in areas such as spine and trauma where small companies with innovative devices abound and where Biomet concedes it needs to grow much faster than it is. “In some of the more attractive high-growth spaces that are more technology-driven, I think you will see us looking for ways to bolster our technology base,” Binder notes.