Originally Published MDDI October 2004

Cover Story



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

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.”

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.

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.”

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.

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

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

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