Biomet's Rebirth?

Biotech Financing Private Equity Comes to Discovery roger loNgmaN Windhover information inc. september 2007 windhover.com Vol. 25, No. 8 Biopharmaceutical Dealmaking Specialty Pharmaceuticals Finding a Way Out of Pharma’s Europe’s New Dealmaking Dilemma Spec Pharma Models roger loNgmaN melaNie seNior Medical Devices/Cardiovascular Drug Development CVRx: Can Devices Succeed Where Avandia and the Drugs Fail for High Blood Pressure? Commercial Impact of stepheN leViN FDA’s Credibility Gap ramsey baghdadi 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, 2 | September 2007 | IN VIVO: The BuSINeSS & MedIcINe RepORT | ©2007 www.windhover.com Medical Devices / Orthopedics 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.

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