P.O. Box 587
Warsaw, Indiana 46581
Fax: (219) 267-8137
Sales: $340 million
Stock Exchanges: NASDAQ
SICs: 3842 Orthopedic, Prosthetic, and Surgical Appliances & Supplies
Biomet, Inc. is one of the largest and fastest growing U.S. manufacturers of orthopedic medical devices and supplies. Biomet and its subsidiaries design, develop, manufacture, and market products used primarily by orthopedic specialists in surgical and non-surgical therapy, including reconstructive implants and artificial joints, electrical bone growth stimulators, and operating room supplies.
Located in Warsaw, Indiana, Biomet is part of a seemingly average midwestern community with a population of less than 30,000. What makes Warsaw unique, however, is its reputation as a high-tech hotbed of orthopedic equipment industry innovation. Recognized as the birthplace of the business—industry leaders Depuy Inc. and Zimmer Inc. started operations there in 1885 and 1926, respectively—the north Indiana town is home to three of the four largest orthopedic supplies companies in the world. It is from this pool of long-standing talent that Biomet emerged.
Dane A. Miller, Jerry Ferguson, Ray Haroff, and Niles Noblitt were all employed in Warsaw’s diverse orthopedic equipment industry in the mid-1970s. While working for different companies, they became acquainted with each other through their business dealings. As early as 1975 the four had shared their dissatisfaction with what they viewed as a stifling corporate culture within the industry, but it was not until the late 1970s that they decided to do something about it.
Ranging in age from only 26 to 31, the four entrepreneurs quit their jobs in 1978 to start Biomet. The group pooled $130,000 of its own money, received a $500,000 loan from the Small Business Administration, and secured a $100,000 line of credit from a local bank. By taking suggestions from surgeons and emphasizing short product development cycles, they believed they could improve upon artificial joint implant designs offered by the companies they abandoned. Their diverse experience in marketing, engineering, and finance could be parlayed into a formidable force in the orthopedic implants industry. Notably, Miller, who would become Biomet’s CEO, brought a PhD in biochemical engineering to the table.
With good reason, critics of the new venture wondered about the timing of the start-up. Shortly before the friends left their safe corporate jobs, amendments to the federal Food and Cosmetics Act placed squelching legislation on the artificial implants industry. Indeed, many industry participants believed that new safety regulations and product liability hazards had made the implant business too risky. “People laughed at us for starting up a new company after the new device legislation went into effect,” Miller recalled in Indiana Business. “[Getting the company started] was traumatic. In retrospect, it was a lot more traumatic than it seemed at the time.”
Despite hardship, Biomet was able to find a role in the marketplace as a developer and marketer of orthopedic products, contracting with independent manufacturing shops to make its implants. In its first year of operation the company developed a breakthrough titanium “total hip replacement” implant, the first of which was implanted in Miller’s grandmother. Total hip replacement devices and the use of titanium both became industry standards by the late 1980s. Although Biomet had only $17,000 in sales during its first year of operation and lost a total of $63,000, by 1980 the struggling enterprise was turning a meager profit.
Unfortunately, Miller and his three partners realized that they were essentially training the manufacturing shop operators to build and sell Biomet-inspired products to their competitors. Unable to locate financing for their own manufacturing program to overcome this dilemma, the Biomet founders considered selling the fledgling business. However, the company was saved by two brothers from Kalamazoo, Michigan, who provided $500,000 in venture capital in return for one-third ownership of the business. Thus the Biomet team found itself in the manufacturing business.
Biomet’s second major product innovation occurred in 1980, when it introduced the metal-backed acetabular cup. It was a device used in total joint replacement that increased the longevity of implant-to-bone stem attachments. “That was one example of how we took an opportunity, responded to it quickly, and then took it to the market,” Miller related in Indiana Business. The company broke new ground again in 1983 with its development of a high-tech knee implant system that allowed a surgeon to align ligaments precisely, ensuring that the joint worked properly. The invention was held up for several years, however, because of technical problems and FDA approval.
Breakthroughs like the acetabular cup and titanium hip replacements were central to the momentum Biomet was gaining during the early 1980s. Likewise, aggressive marketing and innovative delivery systems placed the company on the forefront of customer service and cost-containment. Contradicting their detractors, the Biomet management team slowly boosted annual company revenues and profits. By 1984 annual sales had grown to $10.6 million and earnings topped a healthy $1.6 million.
Aside from innovations in product development, marketing, and operations, Biomet founders attributed much of their success to a unique corporate culture that bred creativity and achievement. The company was founded on a premise of risk-taking and teamwork, and maintains a very loose structure. Biomet has developed only one organizational chart during its history, and that was created only to please a potential lender. “We try to avoid a lot of structure.... Whoever is there to make a decision makes it,” CEO Miller stated in Indiana Business.
In addition to its unorthodox organization, the company prospers by shattering many business school myths that Miller believes are a hindrance to other corporations. While many organizations rely on detailed planning to reach their goals, for example, Biomet spends about one percent of its time planning and the rest of the time implementing and monitoring results. “Too much planning sometimes keeps a company from responding to a world that is changing around it,” Miller explained in the Elkhart (Indiana) Truth. Another myth, according to Miller, is that a company should set a goal and not let anything interfere with the accomplishment of that mission. “One thing you have to let get in the way from time to time is reality,” he said.
Also a part of Biomet’s management strategies is intimate worker involvement in, and employee reliance on, the company’s performance. All employees are stockholders, either through stock options or by way of a benefit plan. And half of senior management’s compensation is directly dependent on Biomet’s financial performance. Miller sets the example for his employees by accepting a comparatively conservative compensation package. In fact, Miller was cited in Business Week during 1992 for giving shareholders more for their money than any other CEO surveyed—he received only $712,000 between 1989 and 1991 while shareholders garnered huge returns. In the Indianapolis Business Journal, Miller declared “I’d have to admit that if my board came to me and said, ’We’re cutting your salary to zero,’ I’m having enough fun that I’d come into work anyway.”
Indeed, if Miller’s job satisfaction was any reflection of the company’s performance during the mid- to late 1980s, he was a very happy man. After posting its $1.6 million profit in 1984, Biomet entered a sustained period of steady, rapid growth that soon earned the company international recognition within the industry. In 1985 Biomet acquired Orthopedic Equipment Co., a local manufacturer, for $8.4 million, boosting its revenues for that year more than 300 percent. Sales continued to swell through 1988, when the company purchased New Jersey-based Electronic-Biology Inc. (EBI), which develops and produces devices that stimulate bone growth. As a result of this important acquisition, Biomet’s 1989 revenues leapt to $136 million, of which one-third was contributed by EBI.
Even by the mid-1980s, Biomet’s success had earned the company a lofty position in the hierarchy of Warsaw’s orthopedic supplies business. Biomet was still dwarfed by Zimmer and Depuy, but its rapid growth and unique products garnered the company third place in the local industry, making Biomet a competitive force that could not be ignored. All three major producers credited the local community with supplying a high-quality, hard-working supply of labor that helped to ensure their success. The region also provided an excellent location for distribution and offered fantastic land prices, cost-of-living advantages, and a high quality of life.
While grateful to the community, by the late 1980s Biomet had already begun to branch out from its native turf. Not only was the company seeking domestic growth, but Biomet management was fully committed to an international expansion effort that was expected to carry the corporation into the 21 st century. In fact, Biomet had been chasing international business even before becoming incorporated in 1981. By the early 1990s, international sales represented about 25 percent of the company’s revenues and comprised more than 30 percent of its annual growth.
The success of Biomet’s important international business reflected the drive and initiative of Chuck Niemier, senior vice president of international operations. Niemier was a 24-year-old accountant at an outside audit firm when he was introduced to Miller and the small Biomet team. “I think because of my hairline, he thought I was older,” recalled Niemier in Indiana Business. Miller liked Niemier, and was able to lure him to Biomet with an offer of $26,000 per year and a chance to own some Biomet shares.
Niemier played an early role in developing Biomet’s international expansion, which entailed delivering cutting-edge implant products to overseas buyers. During the 1980s and early 1990s, the company expanded into Europe, South America, Japan, the Middle East, the Soviet Union, and other regions. In those countries where Biomet maintained manufacturing facilities, including Germany and England, a direct sales force was established; in other countries it worked through dealer organizations. Niemier benefitted from Biomet’s flat organizational structure and decentralized decision-making process. The Berlin Wall had barely fallen, for example, before Biomet acquired what became a successful German orthopedics firm.
Not all of Biomet’s international deals played out so nicely, however. When the company received a multi-million-dollar order for trauma products from Iraq in the early 1990s, for instance, Biomet managers were excited. Several months later, though, Iraq invaded Kuwait, providing insight into Iraq’s giant order and ending Biomet’s dealings with the aggressor nation. Likewise, Biomet invested in several ventures in the Soviet Union during the early 1990s, only to have that market dry up as a result of inner political turmoil. Regardless of minor setbacks, international growth remained a priority for the company going into the mid-1990s. Biomet was operating in about 100 countries by 1992.
Augmenting rising international sales in the late 1980s and early 1990s were continued product and manufacturing innovations that kept Biomet on the leading edge of the industry. In 1989, for example, Biomet technicians began utilizing computer-aided-design (CAD) systems to create three-dimensional images of diseased and damaged joints. When integrated into the production process, the CAD systems allowed Biomet to customize artificial joints for individual patients. The company also became involved in advanced research projects related to bone-growth protein, flexible carbon-fiber implants, and the use of naturally occurring soft tissue to lubricate artificial joints.
By the early 1990s, Biomet’s stellar rise had earned the company a reputation on Wall Street as a solid growth stock. In 1992, for example, USA Today listed Biomet as one of “the hot stocks to watch in the 1990s.” Although the 30 percent growth rate in the company’s stock price enjoyed by shareholders during the late 1980s and early 1990s had subsided by 1993, it continued to outperform many of its competitors and was considered a good, long-term purchase by a number of analysts.
Furthermore, Biomet’s profit growth continued unabated in the early 1990s and was even accelerating going into the mid-1990s. Sales jumped 22 percent in 1993 to $335 million, and net income ballooned to $64 million. These figures represented five-year compound annual revenue growth of 28 percent in the reconstructive device segment (56 percent of Biomet sales) and 17 percent in the EBI division (25 percent of sales); the remaining revenue was generated from the sale of miscellaneous supplies.
But aside from sales and stock statistics, Miller and the Biomet managed team looked to another, less tangible measure of their company’s success—its victories in helping people to lead better lives. “I believe as we look back 10 years, the evolution of orthopedics has led to the rehabilitation of America,” Miller explained in Indiana Business. “Ten years ago, if you were incapacitated with a bad knee or hip, you were in bed for the rest of your life.... In the last ten years, the tools and products have been developed to allow . .. patients to live a normal life.”
Going into the mid-1990s, Miller and Noblitt were the only Biomet founders left at the company (Ferguson opened a classic car dealership, and Haroff bought a golf course). They and other company leaders had ambitious plans for the future, including development of new high-tech products, aggressive global growth, and diversification into new technologies and markets. In the meantime Biomet’s entrepreneurial atmosphere and quick-response management structure would be retained, owing to the success of such technological breakthroughs as the Maxim, a cutting-edge knee implant introduced in 1993, which was expected to significantly boost profits from the fast-growing knee replacement market. In a nutshell, Biomet intended to cling to its reputation as a customer-oriented supplier of leading edge, low-cost, high-performance orthopedic devices.
Despite Biomet’s past successes and management’s rosy outlook, several impediments to the company’s success loomed on the horizon. Chief among them was the impending federal health care reform plan, which could mean many of the products sold by Biomet might become subject to the buying decisions of government regulators. Under the plan proposed by the Clinton administration in 1994, companies like Biomet would have to seek federal approval of new innovations because the government would choose those technologies that could be purchased by health care providers. The effects of reform proposals (as well as increasingly torpid Food and Drug Administration product approvals) were already having a negative impact on Biomet in the early 1990s, as funding for new research and development waned.
On the other hand, demographics boded well for the future success of Biomet and its Warsaw contemporaries. Indeed, the Census Bureau estimated that the number of Americans aged 55 to 74 would leap 42 percent between 1989 and 2010, resulting in massive market growth for Biomet’s products. The 75-and-older group will grow even faster. Furthermore, new long-lasting implants will allow surgeons to use Biomet offerings in increasingly younger patients, and for a range of new applications. Overseas demand, moreover, should outstrip domestic growth by a potentially wide margin.
EBI Medical Systems.
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