Depuy Inc. Business Information, Profile, and History

Company Perspectives:

We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers' orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit. We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical. We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens--support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.

History of De Puy Inc.

DePuy Inc., a Johnson & Johnson company since 1998, is a leading designer, manufacturer, and distributor of orthopaedic devices and supplies. Founded in 1895, DePuy is the world's oldest orthopaedic company, and it operates through five distinct divisions--DePuy Orthopaedics, DePuy ACE, DePuy AcroMed, DePuy CMW, and DePuy International. DePuy Orthopaedics, which produces hip and extremity implants, knee implants, environmental protection products, and surgical equipment, is the company's core, accounting for more than half of its total revenues. DePuy Orthopaedics' joint replacement products, such as its pioneering AML Total Hip System and LCS Total Knee System, have been particularly successful. DePuy ACE produces specialty orthopaedic trauma products, and DePuy AcroMed has made great strides in the lucrative spinal implants and instruments market. DePuy CMW produces bone cement. DePuy's global arm--DePuy International--also has grown tremendously as the company seeks to expand its overseas sales.

A More Comfortable Splint: 1895--1965

Traveling pharmaceutical salesman Revra DePuy founded DePuy Manufacturing in 1895 in Warsaw, Indiana, to produce a fiber splint he had devised to set broken bones. Prior to DePuy's innovation, splints were made from uncomfortable and cumbersome pieces of hard wood resembling barrel staves. DePuy's alternative sold well, and the company gradually added slings, neck collars, and braces to its product offerings.

After DePuy's death in 1921, the company changed hands a number of times. DePuy's widow, Winifred, ran the business by herself until 1924, when she married Herschel Leiter, who had previously been a salesman with the company. The couple ran DePuy for the next 25 years. In 1926, former DePuy salesman (and Revra DePuy's first hire) Justin O. Zimmer made overtures about buying the business but was rebuffed. In response, Zimmer launched a rival orthopaedic company, Zimmer Manufacturing, which would become DePuy's greatest business rival and a leader in the orthopaedics field.

Leiter assumed sole control of DePuy upon Winifred's death in 1949. He married Amrette Webb Ailes shortly thereafter. Leiter's death in 1950 threw the company into a state of near-crisis, as Leiter had promised to leave control of the company to its salesmen but actually bequeathed it to his new wife instead. An ownership battle raged until 1951 when Amrette and her new husband, former Bell Telephone executive Harry Hoopes, prevailed. For the next 14 years, the Hoopeses ran the company as their personal fief. Although DePuy continued to post annual profits, Amrette and Harry were suspected of diverting company funds for their own purposes. DePuy's products--which by this time included soft goods, splints, bone plates, and screws--remained popular (1950 sales alone hit $3.2 million), but the company made few capital investments and Zimmer Manufacturing soon surpassed it as the industry leader.

Changes in Ownership: 1965--74

In 1965 DePuy was sold to a group of investors led by Bill Weaver of Brown Brothers Harriman & Co. of New York. The deal was engineered by DePuy's executive vice-president, Keaton Landis. 'I was pretty much running [the company] anyway,' Landis told the author of One Hundred Years of Orthopaedic Excellence. 'I wanted it placed with someone with business sense who would make it grow, rather than bleed it.' The investor group selected Landis as DePuy's new president and gave him the formidable task of turning the company around. As a company executive noted in One Hundred Years of Orthopaedic Excellence, 'We had gotten way behind in the orthopedic business. ... The orthopedic industry was beginning to take off, and Zimmer was four times larger than we were.' DePuy's new owners pledged to invest in new product research and development and Landis immediately increased DePuy's sales force.

DePuy changed ownership again in 1968, when Bio-Dynamics, Inc., a blood diagnostic business, acquired it. The transaction was beneficial to both parties; Bio-Dynamics needed a substantial sales force such as DePuy's, and DePuy was in dire need of capital. 'We were underfinanced and we wanted to continue the growth pattern,' Robert Williams, who was named president of DePuy in 1969, told the author of One Hundred Years of Orthopaedic Excellence. Bio-Dynamics financed DePuy's 1968 acquisition of the exclusive rights to market a hip replacement invented by Dr. Maurice Müller. This transaction enabled DePuy to enter the emerging and highly lucrative replacement segment of the orthopaedics market.

Major replacement surgeries were not possible until the late 1960s, when methyl methacrylate (a cement that holds artificial bones in place) was approved by the Food and Drug Administration (FDA) and became widely available. When DePuy gained the exclusive rights to market the Müller Total Hip, the company changed its image from a 'soft goods' orthopaedic firm (selling rib belts, collars, braces, and some pins and wires) to a pioneer in the nascent joint replacement market, with profitable results. DePuy did not, however, abandon its established soft goods business. In 1968 the company purchased the Jackson, Michigan-based Kellogg Industries, a garment and equipment manufacturer. DePuy transferred its soft goods production to Jackson, thereby freeing its Warsaw factory to concentrate on manufacturing total hip replacements.

A New Era: 1974--90

Bio-Dynamics sold DePuy in 1974 to Boehringer Mannheim Companies, a privately held German pharmaceutical giant that was itself controlled by the holding company Corange, Ltd. (DePuy was not the only orthopaedic company in transition; arch-rival Zimmer was acquired by the Bristol-Myers Co. in 1972.) Under its new ownership, DePuy flourished, taking advantage of the resources and autonomy Boehringer offered. DePuy's primary achievement during this decade was its development (along with Dr. Charles Engh) of an artificial hip, the Anatomic Medullary Locking stem, that was the first to incorporate biological fixation (the attachment of hip prostheses by human tissue rather than artificial fixants such as methyl methacrylate). In 1977 DePuy began marketing the product under the brand name AML, which quickly became one of the company's best-selling items and remained a flagship product into the 21st century.

In 1979 the company gained the rights to use a new technology--a method of sintering a porous surface to orthopaedic implants, thereby allowing human tissue to be more effectively fixed--devised by Canadian Oxygen, Ltd. Marketed as Porocoat Porous Coating, the process became essential to DePuy's artificial joint business and boosted sales. In 1980 DePuy introduced its LCS Total Knee System, an artificial knee that used mobile (rather than fixed) bearings to duplicate more closely the mechanics of a healthy human knee.

During the 1980s, DePuy also benefited from the continued expansion of the U.S. healthcare industry. James Lent, who had accrued considerable industry experience as the president of Johnson & Johnson's orthopaedic division, took over as company president in 1985 after Robert Williams's retirement. Williams's tenure had been a successful one, during which DePuy grew from ten to 300 employees. 1985 revenues alone topped $95 million. Lent oversaw a period of even greater expansion, as DePuy introduced a slew of new products, including the AMK Total Knee System, the Global Total Shoulder System, and the Solution System.

Lent also pushed the venerable company to diversify its focus beyond orthopaedic products and joint replacements. To achieve this goal DePuy teamed up with E.I. duPont de Niemours and Co. (DuPont) to combine DuPont's superior research, development, and engineering divisions with DePuy's established position in the orthopaedic products market. This DePuy DuPont partnership, inaugurated in 1989, led to DePuy's production of environmental protection devices, such as Life Liner gloves. These glove liners were made from Kevlar and protected healthcare workers from possibly dangerous cuts and needle sticks.

New Strategies in Era of Managed Care: The Early 1990s

Lent changed offices in 1990, becoming DePuy's chairman and chief executive officer. Mike McCaffrey, also formerly at Johnson & Johnson's orthopaedics division, succeeded Lent as president. McCaffrey continued Lent's diversification efforts, but was faced with a new obstacle--massive changes in the U.S. healthcare industry. After the boom years of the 1970s and 1980s, the American healthcare landscape changed radically in the early 1990s with the advent of managed care companies, which used their size to negotiate bulk rates for medical treatment so as to contain costs. Health Industry Today succinctly explained the situation: 'Buying groups, product standardization, and health care reform, led by the managed care movement, have chewed deeply into manufacturers' profit margins. The days of double-digit growth are gone, probably forever.'

DePuy rushed to adapt, accelerating the pace of its diversification into new markets and products. As the Indianapolis Business Journal noted, DePuy's 'strategy feature[d] a blizzard of acquisitions and joint ventures [to] extend DePuy's reach in domestic and foreign markets and expand its product line.' By expanding, DePuy planned to achieve cost savings through greater economies of scale and to make itself a better fit for large health care buyers who preferred 'one stop shopping' for products. As part of this plan, DePuy acquired the Rotek Corporation in 1992. After the purchase, DePuy broadened Rotek's roster of environmental protection products (which already included the Vacu-Mix bowl and Sterile View hoods and helmets), adding more Sterile View items, Repel and Life Liner Glove Liners (designed in conjunction with DuPont), and the Opti-Con family of products. In 1992 DePuy also teamed up with biotechnology leader Genentech, Inc. to produce orthopaedic devices that incorporated Transforming Growth Factor Beta, a protein that can impact bone tissue growth and regeneration.

In 1993 DePuy ventured into the fastest-growing segment of the orthopaedics market, spinal implants, forming a joint venture with Biedermann Motech, a German manufacturer of such devices. The product of this collaboration--DePuy Motech Inc.--developed, manufactured, and marketed spinal implants. DePuy again broke new ground in 1994, as Boehringer Mannheim acquired ACE Medical Company, a manufacturer of orthopaedic products for the surgical repair of trauma injuries, and placed it under DePuy's control (where it was renamed DePuy ACE Medical Co.). With 1993 sales exceeding $35 million, ACE offered DePuy access to the lucrative trauma products market. In 1994, DePuy added yet another company to its family of businesses when it purchased Orthopedic Technology for $46.2 million. A manufacturer of external braces for sports medicine, Orthopedic Technology also bolstered DePuy's position in the 'soft goods' market.

During this period, DePuy looked to expand abroad as well. In April of 1990, Boehringer Mannheim had acquired Charles F. Thackray Limited of Leeds, England. Since 1963, Thackray had been one of the largest manufacturers of total hip replacements in the world and had distributorships and sales staffs in 100 countries. Indeed, Thackray sold 18 percent of all replacement joints worldwide, making it an excellent platform from which DePuy could increase its international reach. In November of 1991, DePuy made Thackray its international headquarters and rechristened it DePuy International Ltd. William Tidmore (who would go on to replace Mike McCaffrey as DePuy's president in 1994) was named the new entity's first president. 'From our base in Leeds, we plan to develop our business and to extend out market share ... in Europe and other international markets,' Tidmore explained in DePuy Ink (a company publication) in 1992.

Throughout the first half of the 1990s, DePuy created a bevy of subsidiaries to further its global growth, establishing operations in France and New Zealand in 1990, in Australia and South Korea in 1991, in Germany, Italy, Japan and Spain in 1992, and in Portugal and India in 1994. DePuy also made major changes to its distribution system in Latin America. These efforts yielded tremendous results. International sales had accounted for only five percent of total sales in 1984, but represented 35 percent of DePuy's sales by 1995.

Rapid Growth in the Mid-1990s

DePuy's pace of expansion quickened further in the mid-1990s. Corange partially spun off DePuy in 1996, selling 15.8 percent of the company in an initial public stock offering that raised $258 million (funds that DePuy earmarked for future acquisitions). Michael Dorner was installed as DePuy's newest president the same year.

Flush with capital, DePuy bought Landanger-Camus, the leading French manufacturer of hip implants and one of that nation's primary distributors of orthopaedic devices and supplies, in 1997. As James Lent explained in a company press release, 'The acquisition enhance[d] [DePuy's] position as #2 in the worldwide hip market ... and provided a launching pad for further consolidation in Europe.'

Another major change occurred that year as well. Roche Holding Ltd., one of the world's largest drug companies, purchased Corange for $11 billion. Roche, however, was more interested in Corange's diagnostics business than in DePuy's orthopaedic interests, and analysts predicted that Roche would quickly sell off this part of its new acquisition. Nonetheless, DePuy's position in the global orthopaedics market was impressive. By May of 1997, DePuy controlled a 17 percent share of the $7.3 billion orthopaedic market, second only to its old nemesis Zimmer.

In 1998 DePuy made a major acquisition when it purchased the Cleveland, Ohio-based AcroMed Corp. for $325 million. AcroMed was the world's second largest producer of spinal implants (with sales in 1997 of more than $90 million) and provided DePuy with the opportunity to command a greater share of that quickly growing market (which DePuy had initially entered with the formation of DePuy Motech in 1993). AcroMed not only manufactured a line of lucrative spinal implants, but had recently invented the Brantigan I/F Cage, a carbon-fibre reinforced spinal fusion cage, and had the AcroFlex artificial disk in development. AcroMed was renamed DePuy AcroMed and became known as the world's second largest spinal implant company.

A Johnson & Johnson Company: 1998 and Beyond

DePuy itself was bought by Johnson & Johnson for $3.5 billion in November 1998. Johnson & Johnson then merged its own orthopaedic business, Johnson & Johnson Professional, into DePuy, creating the world's largest orthopaedic products company, formally known as 'DePuy, Inc., a Johnson & Johnson Company.' James Lent was selected to lead the combined operations, which were integrated rather seamlessly (aided by the fact that DePuy's top two executives were Johnson & Johnson veterans and that the two companies' product lines complemented rather than competed with one another).

Under Johnson & Johnson's guidance, DePuy shuttered its DePuy OrthoTech subsidiary in July of 2000. According to the Stockton Record, Johnson & Johnson planned to focus primarily on orthopaedic implants and spinal and trauma products, and it wanted to scuttle its soft goods arm. DePuy continued to form alliances with other companies--especially in the realm of orthobiologics (tissue engineering for orthopaedics). In July of 2000, DePuy reached a distribution agreement with Etex Corporation for Etex alpha BSM (bone substitute material), which might prove useful for treating fractures and bone voids. The following month, DePuy obtained the exclusive marketing rights to Biotty, Bio-Technology General Corp.'s proprietary product for the treatment of knee pain associated with osteoarthritis.

DePuy's future prospects looked bright. The company had diversified to the point that 50 percent of its sales in 1999 occurred outside the United States. By actively pursuing the emerging field of orthobiologics, DePuy was laying claim to cutting-edge technology for the future. Furthermore, as the massive baby boomer generation aged, DePuy could look forward to a growing market for its orthopaedic implants.

Principal Divisions: DePuy Orthopaedics; DePuy ACE; DePuy AcroMed; DePuy CMW; DePuy International.

Principal Competitors: Biomet, Inc.; Bristol-Myers Squibb Company; Exactech, Inc.; Medtronic Sofamor Danek, Inc.; Orthofix International N.V.; OrthLogic Corp.

Chronology

• Key Dates:

• 1895: Revra DePuy founds DePuy Manufacturing in Warsaw, Indiana.
• 1921: Revra DePuy dies; his wife Winifred takes control of the company.
• 1949: Winifred dies, and passes control of company to her second husband, Herschel Leiter; Herschel Leiter marries Amrette Webb Ailes.
• 1950: Leiter dies.
• 1951: Amrette Leiter marries Harry Hoopes; the couple run DePuy jointly.
• 1965: A group of investors, led by Bill Weaver, purchases DePuy from the Hoopeses.
• 1968: DePuy is acquired by Bio-Dynamics; DePuy enters hip replacement sector; DePuy purchases Kellogg Industries.
• 1974: DePuy is acquired by Boehringer Mannheim Companies (owned by Corange Ltd.).
• 1987: DePuy forms a partnership with E.I. duPont de Niemours and Co.
• 1990: Boehringer Mannheim purchases Charles F. Thackray Ltd.
• 1992: DePuy forms alliance with Genentech, Inc.; DePuy acquires the Rotek Company.
• 1993: DePuy enters into a joint venture with Biedermann Motech dubbed DePuy Motech.
• 1994: Corange purchases ACE Medical Products and forms new company, DePuy ACE Medical Co.
• 1996: DePuy acquires Landanger-Camus; Corange announces an IPO for DePuy.
• 1998: Roche Holding Ltd. purchases Corange in a transaction that includes DePuy; DePuy acquires AcroMed Corp., thereby becoming the world's second largest spinal implant company; Johnson & Johnson purchases DePuy from Roche.