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Justice Department Shakes Up Ortho’s Big Five

MOVERS AND SHAKERS 2006

Orthopedics is one of the hottest segments in the device industry, but in the past year it has had its share of publicity for more than just technology.

In 2005, a U.S. Department of Justice (DOJ) investigation focused on relationships between implant manufacturers and orthopedic surgeons. Then, last June, the DOJ issued subpoenas involving potential antitrust violations to five major orthopedic companies—Biomet Inc. (Warsaw, IN), Smith & Nephew Plc (London), Johnson & Johnson's DePuy Orthopaedics Inc. (Warsaw, IN), Stryker Corp. (Kalamazoo, MI), and Zimmer Holdings (Warsaw, IN). The subpoenas requested documents from January 2001 through the present concerning the potential violation of antitrust laws.

Most of the investigation has remained under wraps. However, at the end of July, Smith & Nephew revealed the outcomes of an internal probe spurred by the DOJ subpoena. It found that an independent orthopedic sales representative, who was under company contract, sent an e-mail in October 2005 to competitors. According to the release, the e-mail suggested that they submit a “coordinated response” to an undisclosed hospital's request for bids on orthopedic implants. Smith & Nephew stated that the actions of the salesperson weren't authorized by company management and to its knowledge, the e-mail wasn't acted upon, nor did an anticompetitive agreement result from it.

“We still don't have any closure on the DOJ investigation,” says William Plovanic, managing director and equity research analyst at First Albany Capital (Chicago). “Typically, we've seen it come down [so that] companies don't admit or deny guilt; they pay a penalty, move forward, and change practices from there.”

The controversy surrounding the Justice Department's investigation didn't prevent the acquisition of Biomet in mid-December. After the company put itself up for sale last year and rumors swirled about a buyout by Smith & Nephew, a deal was finally made with a private equity group. Blackstone Group (New York City), Goldman Sachs Capital Partners (New York City), Kohlberg Kravis Roberts & Co. (New York City), and Texas Pacific Group (San Francisco) agreed to buy the company for $10.9 billion. The purchase should be completed by October 31, 2007, after which the company will no longer be publicly traded. Former CEO Dane Miller, who resigned in March, has been rumored to be an investor in the company.

Being acquired by a private equity firm could make Biomet a stronger competitor in orthopedics, according to Plovanic. “A private equity firm can look at the company as the sum of its parts, keep the parts it likes, and spin off what [may not be seen] as profitable or beneficial to the company as a whole.” He adds that the change in management could bring a fresh perspective to Biomet.

The news of the acquisition might not have been celebrated for long, however, as on the same day of the announcement, Biomet stated that it was delaying its second-quarter earnings release after reviewing stock option practices. The company formed a committee to investigate stock option grants from 1996 to the present, which revealed, in a preliminary report, that a “substantial number” of grants issued were backdated to take advantage of a lower stock price on certain dates. The committee reported that some members of senior management were aware of the practice. Two shareholder lawsuits have also been filed against Biomet executives and board members, alleging the manipulation of stock options timing.

Although Smith & Nephew didn't get Biomet, it received a share of proceeds from its joint sale of BSN Medical GmbH & Co. KG (Hamburg) in early 2006. Smith & Nephew formed the company in 2001 with Beiersdorf AG (Hamburg) to combine their wound care, casting, bandaging, and phlebology businesses. Montagu Private Equity (London) bought BSN Medical for about $1.36 billion. BSN medical has three business units—orthopedics, wound care, and phlebology, which collectively bring in more than $500 million a year. Its orthopedics business, headquartered in Charlotte, NC, focuses on products for strains, sprains, and fractures.



Copyright ©2007 Medical Device & Diagnostic Industry
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