In orthopedics sector, the big players are getting even bigger
By DUANE FELDMAN and BARBARA SIMES-TUCKER BBI Contributing Writers Within the orthopedics industry there is a trend toward consolidation. Large, well-established com-panies and medium-sized companies have been pur-chasing start-up companies at an increasing rate. Medium-sized companies, such as Interpore Inter-national and Cross Medical, have been merging. The most recent development in the market is for leading orthopedics companies to be acquired by other market leaders. With rumors of more major acquisitions running rampant, it is likely other major consolidations are in the works. Recent acquisitions of two major orthopedics companies have orthopedics industry insiders talk-ing. In March 1998, DePuy (Warsaw, Indiana) acquired AcroMed (Cleveland, Ohio), the second-largest manufacturer of spinal implants. And then in July, DePuy was itself acquired by Johnson & John-son (New Brunswick, New Jersey). This merger was soon followed by the mid-August announcement that Stryker (Kalamazoo, Michigan) would purchase Howmedica (Rutherford, New Jersey) from its par-ent company, Pfizer (New York). And more deals are on the way. It has been reported that Bristol-Myers Squibb (New York) may be open to divesting Zimmer (Warsaw, Indi-ana). Industry watchers see Sulzer Medica (Win-terthur, Switzerland) as considering the purchase of Zimmer or Sofamor Danek (Memphis, Tennessee). DePuy’s recent acquisition activities DePuy is a leading manufacturer of hip and knee implants and has a broad range of orthopedic products. These include reconstructive and trauma products, spinal implants, sports medicine products, bone cements, and operating room supplies. DePuy also is a pioneer in developing tissue regeneration technology. In 1997, the company employed more than 3,200 people. DePuy had total worldwide sales of $770.2 million in 1997, of which 55% occurred in the U.S. The vast majority of DePuy’s domestic sales come from implants (64.8%). Throughout the 1990s, DePuy has been working to expand its product line through strategic acquisi-tions. Its 1993 purchase of Motech made the compa-ny a top five player in the spinal implant market, while its 1994 acquisition of Ace increased DePuy’s presence in the trauma market. In 1994, DePuy entered the bone cement market with its purchase of CMW, while its 1996 purchase of Orthopedic Tech-nology increased its influence in the sports medicine segment. Corange Ltd. (Hamilton, Bermuda), the parent company of DePuy, allowed DePuy to go public in October 1996. The funds raised by the sale of stock were used to partially fund DePuy’s April 1997 acqui-sition of Landanger-Camus (Chaumont, France). External financing also was used to fund the $150 million purchase. Landanger makes hip implants and distributes orthopedic products. In March of this year, Roche Holdings Ltd. (Basel, Switzerland) purchased DePuy’s parent, Cor-ange. Roche owned 84% of DePuy, with the rest of the stock being traded publicly. DePuy’s Motech division was third worldwide in the 1997 spinal implant market with sales of $34.6 million, all of which came in the U.S. This accounted for just 8.1% of DePuy’s 1997 estimated domestic sales. At the time DePuy acquired it this past March, AcroMed was the No. 2 player in the global spinal market. AcroMed specializes in spinal fixation and bone plating devices. One could argue that AcroMed offers the most complete spinal implant line, even more complete than the market leader, Sofamor Danek. AcroMed had global sales of $89.8 million in 1997, of which U.S. spinal implant sales accounted for $58.7 million. Spinal implants accounted for 90% of AcroMed’s domestic sales. DePuy financed the $325 million purchase of AcroMed with a $300 million line of credit. Even when the spinal implant lines of DePuy and AcroMed are combined, they are expected to remain the No. 2 provider behind Sofamor Danek, which had spinal implant sales estimated at $197.5 million in the U.S. J&J’s orthopedics position Johnson & Johnson Professional (Raynham, Massachusetts), a division of Johnson & Johnson, competes in joint implants, trauma products, bone fracture casting materials and other markets. J&J’s Codman & Shurtleff division provides surgical brac-ing and neurosurgery equipment. With its earlier acquisitions of Mitex and Joint Medical, J&J Profes-sional became a secondary player in the implant market. Despite numerous small acquisitions, J&J could not reach the critical mass necessary to become a market leader. For 1997, J&J’s U.S. orthopedics sales of $338 million were estimated to account for 81.1% of its total worldwide sales of $416.8 million. At an esti-mated $215 million, implants accounted for 63.6% of J&J’s U.S. sales in 1997. J&J was a minor player in the spinal implant market, with just 7.5% of 1997 domestic sales in this market segment. Bone anchors made up 11.2% of J&J’s 1997 sales while cast room products made up 13.8% of sales. With its purchase of DePuy, J&J has achieved its goal of becoming a top three orthopedics manu-facturer. J&J is paying $3.5 billion in cash for DePuy, which is less than four times sales, 10 times EBIT and 22 times 1999 consensus estimates for DePuy. It hopes to complete the transaction by year-end. The 1997 sales of soft goods by AcroMed, DePuy and J&J combined come to $55.6 million. DePuy had trauma product sales of an estimated $28.8 million while J&J had sales of $5 million in 1997. The com-bined company should control 25% of the recon-structive products market. Howmedica/Stryker The planned $1.9 billion acquisition of How-medica by Stryker will result in a new leader in worldwide orthopedic products. Stryker has more than 5,200 employees around the world. In 1997, it had sales of $980.1 million. Its Surgical Products operation includes orthopedic implants, powered instruments, and endoscopic products. Stryker’s surgical products account for nearly 75% of its operating profits. Stryker’s estimated orthopedic products sales of $429.7 in the U.S. accounted for 45.3% of the compa-ny’s total 1997 sales. It also had $203.6 in U.S. sales of non-orthopedic goods. About 45% of the compa-ny’s domestic orthopedics sales came from $196 mil-lion in implant sales. Spinal implants accounted for 2.7% of Stryker’s 1997 sales, while powered instru-ments accounted for 17.4% and arthroscopy prod-ucts for 18%. With 1997 sales of $20.5 million, bone cement accessories made up 4.8% of the company’s U.S. orthopedics sales. Wound drainage products and irrigation products totaled 3.0% and 4.5%, respectively, of U.S. orthopedics sales in 1997. Howmedica, the fifth-largest orthopedic compa-ny, is a division of Pfizer’s Medical Technology Group, which the company has been dismantling in 1998 in order to focus its efforts in the pharmaceuti-cal area. Howmedica had $865.5 million in world-wide sales in 1997, with U.S. sales totaling $401.6 million, or 46.9% of total sales. Howmedica’s prod-uct lines include reconstructive implants, internal fixation, external fixation, and bone cement. Of the U.S. sales, 61% came from implants, 22.5% from trauma products, and 16.5% from bone cement. This acquisition essentially doubles the size of Stryker. Howmedica’s product lines are comple-mentary to those of Stryker. For example, Stryker makes accessories for bone cement, but does not have a cement on the market. Howmedica sells Sim-plex P, the leading bone cement on the market. Stryker will also will take advantage of Howmed-ica’s well-established presence in Europe and Japan. Prospective mergers With the consolidation of DePuy and J&J and Howmedica and Stryker, there is pressure for other major competitors to increase their size if they wish to compete successfully against these new mega-companies. It is said that Bristol-Myers Squibb is looking to sell Zimmer, one of the world’s leading orthopedics companies. Zimmer is a leader in the U.S. and worldwide markets in hip and knee implants and is a major player in most cate-gories in which it participates. Zimmer also is a major player in the trauma market. For 1997, Zimmer’s sales are estimated to be $1 billion (prior to the divestiture of its Linvatec-Hall division). About 60% of Zimmer’s sales occur in the U.S. Key Zimmer product lines include orthopedic implants (including trauma and fracture manage-ment), patient care (tourniquets, orthopedic soft goods, wound irrigation and drainage products), and miscellaneous products. Due to its 1997 sale of Linvatec, Zimmer no longer participates in the arthroscopic market. Although Zimmer also sold its Hall product line, it retained the marketing rights to the Hall products. In 1997 the Hall powered-instrument line had $100 million in worldwide sales, of which 55.1% came from the U.S. Sulzer Medica is looking to broaden its product lines. Sulzer currently participates in only the U.S. implant market with 1997 sales estimated to be $129 million. It is rumored that several companies are consid-ering the Sofamor Danek Group as an acquisition candidate. This company had 1997 worldwide sales estimated at $312.9 million. Over 90% of Sofamor Danek’s 1997 domestic sales of $211.4 million came from spinal implants. The impact of consolidation These mergers may have an impact on the over-all pricing of orthopedics products. Because com-petitors have merged with each other, there may be less pressure from buyers to discount products. Since hospitals and managed care organizations will have fewer alternative sources, they may have to accept higher prices. The new mega-companies should be able to reduce costs by consolidating facil-ities and reducing redundant personnel. Whether this cost savings is passed on in the form of reduced pricing remains to be seen. One popular theory is that in the long run, the mega-companies should be more profitable than they were prior to merging because they will likely reduce operating costs through streamlining opera-tions and personnel, and they will likely be able to increase end prices charged.
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