Originally Published MDDI October
2004
Cover Story
Out from Under
Once an underappreciated subsidiary of a drug company, Zimmer Holdings Inc.
has become one of the world’s top orthopedics manufacturers through strategic
vision and key acquisitions.
Erik Swain
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| Ray Elliott, President and CEO |
Orthopedics maker Zimmer Holdings Inc. (Warsaw, IN) may not have any
billion-dollar products or play in the trendiest markets, but it must be doing
something right.
Once a low-priority subsidiary of a pharmaceutical powerhouse, Zimmer has created
almost $13 billion in market capitalization since becoming independent in August
2001. Once a company that relied heavily on selling reconstructive surgery products
to the North American market, its recent acquisitions have made it a major player
across the worldwide orthopedics spectrum. Once mostly focused on putting out
products, its core competencies now include pioneering surgical techniques and
developing economic models to prove the worth of minimally invasive surgery
(MIS). Less than 10 years ago, Zimmer had six research projects that were allotted
a budget of more than $1 million each. Today it has 146 such projects.
All of these accomplishments have required an extraordinary strategic vision
and a strong determination to turn that vision into results. It is no surprise
that Zimmer’s management team is one of the most respected in the entire
device industry. “They have a plan, they stick to it, and their execution
of it has been almost flawless,” says Raj Denhoy, a senior analyst at Piper
Jaffray (Minneapolis) who covers Zimmer. “The judge of any company is value
creation, and you can’t argue with a $12 billion to $13 billion market
capitalization created in two and a half years. They’ve gotten almost all
their businesses to be best-in-class, and they are really good at managing expectations.”
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| The skeleton above shows many of Zimmer’s implant products and where in the body they are applied. |
Behind the numbers are groups of products and procedures that have revolutionized
orthopedic surgery. Perhaps most notable are the MIS 2-Incision hip replacement
procedure and the MIS Mini-Incision knee replacement procedure. These have enabled
some patients to walk around and go home on the same day as the operation and
be back to work far sooner than before.
Strong management, relentless innovation, sensible acquisitions, and the ability
to understand the needs of all stakeholders in orthopedic surgery are among
the reasons MD&DI has chosen Zimmer as one if its Medical Manufacturers
of the Year.
Early Promise
The Zimmer story began in 1927, when Justin O. Zimmer, a veteran salesman in
orthopedics, decided to form his own company to sell a then-new concept, aluminum
splints. The firm consistently developed and acquired state-of-the-art orthopedic
devices and grew steadily. In 1972, wanting to branch into the device industry,
New York–based pharmaceutical giant Bristol-Myers bought Zimmer and turned
it into a subsidiary.
While part of Bristol-Myers, Zimmer continued to grow, introducing total hip
and knee replacement systems and becoming a leader in cutting-edge areas such
as arthroscopic surgery. But by the mid-1990s, Zimmer was unsure where it fit
within the strategy of the drug giant, now called Bristol-Myers Squibb, and
unsure how it would solidify its reputation as a top orthopedics company.
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| Zimmer’s VerSys System is the company’s flagship hip replacement system. The photo shows a variety of Zimmer components. |
The Zimmer of today began to take shape in 1997, when president and CEO Ray
Elliott and executive vice president and CFO Sam Leno joined the company. Elliott
sensed that a radical shift in strategy would be needed, and he was unsure whether
the drug company would give him the resources to bring it about.
“I had a handshake deal with Bristol-Myers Squibb when I took this job,”
Elliott recalls. “I wanted to ensure that we did not get stuck in the middle.
The deal was that either they build the medical device business up and make
it stronger, or they get out, whether by spinning us off or by selling us. Pharmaceutical
companies tend to put most of their resources into drug development,” he
says, and don’t make their device operations enough of a priority.
MIS as a Platform
By February 1998, Elliott and his team had decided to build Zimmer’s future
around an area not yet common in orthopedics: MIS.
“We decided we had to have a ‘new patient’ strategy,” Elliott
says. “By 1997 we realized we were getting a new kind of patient [for orthopedic
surgery]. They are more active yet also heavier, they want to get back to their
vocation or avocation quickly, and they are more interested in and questioning
of what goes in their body. They don’t want scars and they don’t want
some of the other life-style compromises [that can occur as a result of orthopedic
surgery]. So minimally invasive surgery is a big part of the new strategy.”
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| Zimmer’s headquarters are located in Warsaw, IN. The company has created almost $13 billion in market capitalization since going public in 2001. |
Zimmer proceeded to invest $150 million over the next six years to develop
orthopedic MIS procedures and train surgeons to perform them. Most notably,
the MIS 2-Incision hip procedure revolutionized hip replacement. It involved
two 1.5- to 2-in. incisions, avoided muscles and tendons, and allowed recipients
to go home within two days—sometimes in less than 24 hours. By comparison,
the traditional procedure involved a 10- to 12-in. incision, cut muscles and
tendons, and kept patients in the hospital three to five days.
Along with this strategy came an innovative marketing approach. To spread the
word to the public, Zimmer did very little direct-to-consumer advertising. Since
the advent of the MIS strategy, a Zimmer product or procedure has been featured
on local or national television, radio, or print 163 times. But only eight of
those appearances were a result of paid advertising. The rest were editorial
in nature, chosen for coverage because of the compelling stories of patients
being able to walk so soon after major hip or knee surgery. “The more-objective
format gave the story more credibility, and we spent almost nothing for all
that publicity,” Elliott says.
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| Zimmer’s NexGen family of knee replacements is the world’s largest-selling brand. |
Marketing to surgeons was not difficult at all. In fact, Zimmer is expanding
its teaching facilities because it does not have the capacity to train all the
surgeons who want to learn its techniques. A dozen new teaching centers around
the world are in development.
The difference in the approach was that Zimmer focused on convincing hospitals
and payers that the MIS procedures not only benefited their patients, but also
saved them money. “Productivity is the ultimate goal, so we decided to
take the program to the insurance companies and say ‘if you use our program,
we can get your people back to work in two weeks instead of three months,’”
Elliott says. “And our patients don’t need to go to rehab centers
or use high-cost narcotic painkillers.” The firm spent a lot of time with
private insurance companies, with good reason. Demographic trends indicate that
in the very near future, the average age of an orthopedic surgery patient will
be less than 65, and thus covered by private insurance rather than Medicare.
That argument required a lot of outcome data, which Zimmer worked hard to gather.
The data also helped Zimmer make its case to hospital administrators. “We
wanted to bring the hospitals into the tent and make it a victory for them too,
via surgical cost reduction and shorter length of stay,” Elliott says.
“We were able to link MIS with economic value for all parties. Not only
does the patient feel better, but there are economic improvements throughout
the entire system.”
The Spin-off
In 2000, however, Bristol-Myers Squibb decided it did not want to commit the
resources to make Zimmer an orthopedic superpower. So in August 2001, Zimmer
was spun off and went public on the New York Stock Exchange. The perception
from Wall Street and within the industry could have been that Zimmer was damaged
goods, cast off by a conglomerate that no longer saw it as a healthy contributor
to its long-term strategy or bottom line.
Elliott and Leno, of course, knew that was not the case. They were able to communicate
effectively that the spin-off was a positive for Zimmer and would enhance its
long-term growth prospects.
“That was a very difficult minefield through which to go, and a lot of
credit must go to both organizations. It left both as strong as they were, or
stronger,” says Brian Burke, managing partner of law firm Baker &
Daniels (Indianapolis), which has served as outside counsel to Zimmer. “There
was very clear communication from the leadership of both to Wall Street and
internally.”
Elliott and Leno did an outstanding job of conveying their vision to Wall Street
while being honest about what still remained to be done before that vision could
be realized, says Piper Jaffray’s Denhoy.
“When it was part of Bristol-Myers Squibb, it suffered somewhat, and upon
first going public, a lot of its tasks involved catching up to the rest of the
industry in areas such as using cross-linked polyethylene for implants,”
Denhoy says. “But it was able to get its ship in order, and benefit the
top line because of it.”
Zimmer’s culture of financial responsibility helped. Unlike some other
firms in the device industry, Zimmer under Elliott has made a priority of keeping
cash flow strong, inventories tight, and debt levels reasonable. This has made
it attractive to investors and helped it allocate the resources needed to expand
its R&D efforts.
The Centerpulse Synthesis
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| Zimmer uses robots extensively in its manufacturing process. |
MIS and other new technologies enabled Zimmer to grow robustly in its areas
of expertise. But two significant goals remained elusive. One was to develop
a presence in the lucrative spine market, the fastest-growing orthopedic sector.
The other was to become a top player in Europe and the rest of the world outside
North America.
Zimmer went a long way toward realizing both those goals when it acquired Centerpulse
AG, a Swiss orthopedics company with a strong presence in Europe and a number
of products in the spine market. Zimmer outbid rival Smith & Nephew plc
and closed the deal in October 2003. “It couldn’t have been a more
perfect fit for us,” Elliott says.
The deal created the largest hip, knee, and shoulder/elbow reconstructive surgery
company, with products across the entire continuum of care. It also made Zimmer
a top-six player in the spine market and a top-five player in trauma. It gave
Zimmer a dental-implant business that it intends to hold on to and expand. “It’s
really not that much different from orthopedics—they use the same language,”
Elliott says. “What’s different is the marketing, and the utility
is low relative to need.”
The acquisition has proved worthwhile financially as well. At the time of signing,
Zimmer said it expected to realize $70 million in synergies. Thanks to a diligent
effort by 100 people who do nothing but work on integrating the two companies,
Zimmer is now estimating $100 million in synergies. “It’s still early,
but Centerpulse looks to be a home-run acquisition,” says Denhoy. “It
is a great financial acquisition as well as a strategic fit. The addition of
the spine business could be very important.”
The deal may allow Zimmer to eventually play in the artificial disk sector,
which is receiving much hype as an improvement over spinal fusion surgery. However,
in keeping with Zimmer’s deliberate methods and strategies, the firm will
not rush into the market before the time is right. The first generation of artificial
disks will hit the U.S. market in 2005 and 2006, and there won’t be a Zimmer
product among them, Elliott says. Why? Because he cannot justify acquiring a
first-generation product for more than $300 million when he suspects the market
may not be as lucrative initially as projected. While all companies with first-generation
products should reap strong revenues, there is a risk that all the hype will
result in the procedure being performed on too many people who aren’t a
fit for it. That in turn, he says, could produce lawsuits. As a result, Zimmer
will concentrate on developing in-house a second- or third-generation product
that will be better than its predecessors and emerge at a time when surgeons
have a clearer idea of who should and should not have the surgery.
In the meantime, Centerpulse gives Zimmer a presence in interbody fusion cages
as well as surgical instruments and allograft and bone materials for spinal
procedures. And Zimmer intends to bring those spinal procedures into its MIS
programs.
Driven by Innovation
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| Zimmer has its own internal casting capability, which allows it to form its own components. |
Zimmer’s philosophy behind the materials it uses is similar to that behind
the products it makes and sells. The firm is always on the lookout for materials
that will improve its products, benefit patients, and can be used at reasonable
cost, but it won’t use new materials whose benefits can’t be proven
to outweigh their costs. For example, some rivals tout their ceramic hip implants,
but Elliott says they show “no improvement in patient benefit” over
metal-on-metal and cross-linked polyethylene technologies. “Of course our
sales reps would want [ceramic] so they can expand their offerings, but we’re
not going to sell it just to sell it.”
Zimmer strengthened its position in materials in April 2004 with the acquisition
of Implex Corp., which developed a biomaterial made from tantalum and marketed
as Trabecular Metal Technology. The material has been shown to be a good fit
for orthopedic implants because it is very similar to natural bone in porosity,
structural strength, and bending characteristics. As a freestanding structure,
it allows for development of completely porous devices. Zimmer had begun an
alliance with Implex in 2000, and the acquisition should lead to a number of
projects for the reconstructive and spine areas. “The opportunities are
endless,” Elliott says.
Materials expert Len Czuba, president of Czuba Enterprises (Lombard,
IL), notes that Zimmer “really looks to be innovative with materials and
looks to acquire new technologies in new areas. They have not been afraid to
invest in everything from coatings to porous materials to biodegradables.”
Zimmer’s savvy with materials and its strong vision of what the future
of the device industry will hold has led it into a new territory: orthopedic
biologics. It is involved in several cutting-edge projects that connect orthopedics
with technologies such as gene therapy and tissue engineering. As an example,
Zimmer, Indiana University, and Purdue University (West Lafayette, IN)
received a grant from the state of Indiana to develop and commercialize gene
therapy treatments for articular cartilage and meniscal damage.
This kind of futuristic thinking and careful planning is what has allowed Zimmer
to accomplish so much since Elliott’s management team took over and should
enable it to remain a top orthopedics company well into the future. But recognition
for Zimmer has already come in spades. In January 2004, Forbes magazine named
Zimmer one of its Best Managed Companies in America and one of its Best Big
Companies of America. A month earlier, Money magazine tabbed it as one of 20
“Next Generation” blue-chip stocks, and in June 2003, BusinessWeek
had named Zimmer one of its Top 100 “Hot Growth” companies.
The strong sense of mission and attention to detail is not limited to top management—it’s
something that pervades every area of the organization.
“They are fabulous people to work with. They are well organized, accessible,
responsive, knowledgeable, and cooperative,” says Phil Cashen, business
development manager for Vaupell Inc. (Seattle), an injection molding and assembly
firm that has worked on projects with Zimmer. “They focus as a group and
specify everything that they want very well. They are the kind of company that
you want to go the extra mile for. You don’t worry about putting an extra
guy on a job, or working through the weekend, because you know they’ll
appreciate it.”
One of the qualities that sets Zimmer apart is its ability to follow through
on its vision. A successful device company of any size has had some sort of
vision to drive it, but only a select few are able to put in the work to enable
the results to match or exceed expections. Zimmer is one of them.
“The finest strategy can look good on paper, but until it’s actually
executed, it won’t produce rewards. Zimmer sets itself apart because it
is very focused on execution,” Burke says. “All the constituencies
in the organization down to the lowest levels understand the strategy and how
they are to be a participant in the execution of it. Strong leadership is a
critical element to make that work.”
Copyright ©2004 Medical Device & Diagnostic Industry
