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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________.
Commission file No. 0-12515.
[BIOMET INC. LOGO]
(Exact name of registrant as specified in its charter)
INDIANA 35-1418342
(State of incorporation) (IRS Employer Identification No.)
AIRPORT INDUSTRIAL PARK, 56 EAST BELL DRIVE, WARSAW, INDIANA 46582
(Address of principal executive offices) (Zip Code)
(219) 267-6639
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES RIGHTS TO PURCHASE COMMON SHARES
(Title of class) (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Shares held by non-affiliates of the
registrant, based on the closing price of the Common Shares on July 20, 2001, as
reported by the Nasdaq Stock Market, was approximately $7,838,935,024. As of
July 20, 2001, there were 269,518,156 Common Shares outstanding. These amounts
have been adjusted to reflect the 3-for-2 split of the Company's Common Shares
declared on July 9, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS OF FORM 10-K
INTO WHICH DOCUMENT
IDENTITY OF DOCUMENT IS INCORPORATED
Proxy Statement with respect to the 2001
Annual Meeting of Shareholders of the Registrant Part III
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This report contains certain statements that are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. Those statements include,
but are not limited to, statements related to the timing and number of planned
new product introductions; the effect of anticipated changes in the size, health
and activities of population on demand for the Company's products; the Company's
intent and ability to expand its operations; assumptions and estimates regarding
the size and growth of certain market segments; the Company's ability and intent
to expand in key international markets; the anticipated outcome of clinical
studies; assumptions concerning anticipated product developments and emerging
technologies; the future availability of raw materials; the anticipated adequacy
of the Company's capital resources to meet the needs of its business; the
Company's continued investment in new products and technologies; the ultimate
marketability of products currently being developed; future declarations of cash
dividends and stock splits; the Company's intent and ability to efficiently
expand its salesforces; the Company's ability to sustain sales and earnings
growth; the Company's goals for sales and earnings growth; the Company's success
in achieving timely approval of its products with domestic and foreign
regulatory entities; and the Company's ability to take advantage of
technological advancements. Readers of this report are cautioned that reliance
on any forward-looking statement involves risks and uncertainties. Although the
Company believes that the assumptions on which the forward-looking statements
contained herein are based are reasonable, any of those assumptions could prove
to be inaccurate given the inherent uncertainties as to the occurrence or
nonoccurrence of future events. There can be no assurance that the
forward-looking statements contained in this report will prove to be accurate.
The inclusion of a forward-looking statement herein should not be regarded as a
representation by the Company that the Company's objectives will be achieved.
PART I
ITEM 1. BUSINESS.
GENERAL
Biomet, Inc., an Indiana corporation incorporated in 1977 ("Biomet"), and its
subsidiaries design, manufacture and market products used primarily by
musculoskeletal medical specialists in both surgical and non-surgical therapy,
including reconstructive and fixation devices, electrical bone growth
stimulators, orthopedic support devices, operating room supplies, general
surgical instruments, arthroscopy products, spinal products, bone cements and
accessories, bone substitute materials, craniomaxillofacial implants and
instruments and dental reconstructive implants and associated instrumentation.
Biomet has corporate headquarters in Warsaw, Indiana, and manufacturing and/or
office facilities in more than 50 locations worldwide.
On September 25, 2000, the Company, through its subsidiary, EBI, L.P. ("EBI"),
acquired Biolectron, Inc. ("Biolectron") for $90 million in cash. The Company
has accounted for this acquisition as a purchase and the operating results have
been consolidated from the date of acquisition.
The Company's principal subsidiaries include Biomet Orthopedics, Inc.; Biomet
Manufacturing Corp.; EBI, L.P.; the Biomet Merck joint venture; Implant
Innovations, Inc. ("3i"); Walter Lorenz Surgical, Inc. and Arthrotek, Inc.
Unless the context requires otherwise, the term "Company" as used herein refers
to Biomet and all of its subsidiaries.
PRODUCTS
The Company operates in one business segment, musculoskeletal products, which
includes the design, manufacture and marketing of four major product groups:
reconstructive devices, fixation products, spinal products and other products.
The Company manages its business segment primarily on a geographic basis and has
three reportable geographic segments: United States, Europe and Other.
Reconstructive devices include knee, hip and shoulder systems, as well as dental
reconstructive implants, bone cements and accessories and the procedure-specific
instrumentation required to implant the Company's reconstructive systems.
Fixation products include internal and external fixation devices,
craniomaxillofacial fixation systems and EBI's electrical stimulation devices
that do not address the spine. Spinal products include electrical stimulation
devices addressing the spine and spinal fixation systems. The other product
sales category includes softgoods and bracing products, arthroscopy products,
casting materials, general surgical instruments, operating room supplies, wound
care products and other surgical products.
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The following table shows the net sales and percentages of net sales contributed
by each of the Company's product groups for each of the three most recent fiscal
years ended May 31, 2001.
YEARS ENDED MAY 31,
(DOLLAR AMOUNTS IN THOUSANDS)
2001 2000 1999
PERCENT PERCENT PERCENT
NET OF NET NET OF NET NET OF NET
SALES SALES SALES SALES SALES SALES
---------- ------- ---------- ------- ---------- -------
Reconstructive Devices $ 614,308 59% $ 580,239 63% $ 521,365 63%
Fixation Products 202,152 20% 180,336 19% 162,825 20%
Spinal Products 91,103 9% 54,119 6% 45,125 5%
Other Products 123,100 12% 108,857 12% 101,520 12%
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Total $1,030,663 100% $ 923,551 100% $ 830,835 100%
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RECONSTRUCTIVE DEVICES
Reconstructive devices are used to replace joints that have deteriorated as a
result of disease (principally arthritis and osteoporosis) or injury.
Reconstructive joint surgery involves the modification of the area surrounding
the affected joint and the implantation of one or more manufactured components,
and may involve the use of bone cement. The Company's primary reconstructive
joints are hips, knees and shoulders, but it produces other joints as well. The
Company also produces the associated instruments required by orthopedic surgeons
to implant the Company's reconstructive devices. Additionally, dental
reconstructive devices and associated instrumentation are used for oral
rehabilitation through the replacement of teeth and hard and soft tissues.
In July 1993, the Company received 510(k) clearance from the United States Food
and Drug Administration ("FDA") (see "Government Regulation" section for a
general discussion of the regulatory clearance and approval process) for hip,
knee and shoulder polyethylene components manufactured according to a patented
process and marketed under the trade name "ArCom." ArCom(R) polyethylene
components are machined from uniform compression molded bar stock manufactured
by the Company or molded directly from ultra-high molecular weight polyethylene
resin. The processes used to mold devices and manufacture bar stock are designed
to maximize the mechanical and wear properties of the polyethylene-bearing
material. In addition, the finished components are packaged in argon, an inert
gas, to avoid oxidative degradation during and after sterilization.
KNEE SYSTEMS. The Maxim(R) Total Knee System, the Company's
largest-selling knee system, incorporates cruciate retaining, posterior
stabilized and constrained components, and competes in the primary and revision
knee market segments.
The Company's AGC(R) Total Knee System, with over 15 years of positive
clinical results, is one of the most clinically successful total knee systems in
the orthopedic industry. The AGC(R) Total Knee System consists of cobalt
chromium alloy femoral and tibial components and polyethylene patella components
for patellar resurfacing. AGC(R) knee components are available either with or
without a porous titanium alloy surface, which is designed to enhance the
attachment of bone or bone cement to the implant surfaces. The Company, with
surgeon collaboration, has also developed surgical techniques and supporting
implantation instruments for the AGC(R) total knee and its other knee systems.
These instruments allow for accurate implantation of the components and improved
ligament and tendon balance in the knee.
The Company's offering of knee systems also includes the Repicci II(TM)
Unicondylar Knee System, the Company's first device specifically designed to
accommodate a minimally-invasive knee arthroplasty procedure. This system
incorporates self-aligning metal and polyethylene components. This innovative
procedure, which can often be performed on an outpatient basis, requires a
smaller incision and less bone removal, which may result in shorter recovery
time and reduced blood loss.
The Company's total knee product line includes the Finn(R) Knee Replacement
System. This system offers both resurfacing and segmental component options in a
wide range of sizes to address severe bone loss due to a previous total knee
failure or tumor resection. During early fiscal year 2002, Biomet Orthopedics
plans to release the Biomet(R) Oncology Salvage System ("OSS"). This system,
which builds upon the features of the Finn(R) Rotating Hinged Knee, provides
modular flexibility while reducing overall inventory demands. The OSS components
are designed to be used mainly in instances of severe bone loss or significant
soft tissue instability.
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The Ascent(TM) Total Knee System incorporates an open box posterior stabilized
femoral component with a swept anterior flange that can accept either a
posterior stabilized or constrained tibial bearing. This system is designed with
a deepened patella groove to enhance patella tracking and reduce lateral release
rates. The Ascent(TM) System addresses the needs of both the primary and
revision markets. All tibial bearing surfaces are made from the Company's
proprietary ArCom(R) polyethylene for optimum wear resistance.
The TRAC(R) Mobile Bearing Knee System, which has been successfully launched
in Europe and has completed the patient-enrollment phase of clinical studies in
the United States, is a unique knee system utilized primarily in total knee
arthroplasty for younger, more active patients. Its patented rotating platform
design allows greater anatomic flexibility of the knee.
In late fiscal year 2001, Biomet Orthopedics introduced the Biomet(R) Offset
Tibia Tray System. This product is designed to allow a surgeon to fit the tibial
component into an abnormally aligned tibia. The Offset Tibia Tray System expands
the primary and revision knee replacement capabilities of the Company's
AGC(R), Maxim(R) and Ascent(TM) Knee Systems.
HIP SYSTEMS. All femoral hip prostheses consist of a femoral head and
stem, which can be cast, forged or machined depending on the design and material
used. Because of variations in human anatomy and differing design preferences
among surgeons, femoral prostheses are manufactured by the Company in a variety
of sizes and configurations. The Company currently offers over twenty total hip
systems, most of which utilize titanium or cobalt chromium alloy femoral
components and the Company's patented ArCom(R) polyethylene-lined or
metal-on-metal acetabular components. Many of the femoral prostheses utilize a
porous coating which enhances the attachment of bone and bone cement to the
stem.
Biomet has received clearance under Section 510(k) of the Federal Food, Drug and
Cosmetic Act for many of its porous-coated hip components for cementless use.
These clearances are specifically for noncemented applications in skeletally
mature patients undergoing hip replacement surgery as a result of
noninflammatory degenerative joint diseases including osteoarthritis, avascular
necrosis, traumatic arthritis, slipped capital epiphysis, fused hip, fracture of
the pelvis and diastrophic variant.
One of Biomet's largest-selling reconstructive hip systems is the
Mallory-Head(R) Hip System, which is designed to meet surgeons' needs for both
primary and revision total hip arthroplasty. The primary femoral components
feature a specific proximal geometry for cementless indications and a slightly
different proximal ribbed geometry for those patients requiring fixation with
bone cement. The goal of each of these primary femoral stems is to allow for
proximal loading of the femur to recreate near-normal bone stresses.
The Mallory-Head(R) revision femoral components provide innovative solutions
for difficult revision cases, and have demonstrated outstanding clinical
results. The Mallory-Head(R) Calcar Replacement Prosthesis is offered in both
a one-piece and modular geometry, with design features such as a medial keel,
circumferential proximal porous coating and various distal stem lengths.
Modularity in the calcar revision prosthesis allows for individual customization
at the time of surgical intervention. An optional trochanteric bolt provides
additional rotational stability and implant fixation. This system provides the
surgeon with intraoperative flexibility to independently size the proximal and
distal femur with the appropriate implant size and shape, even in cases of
severe bone deficiency. This is accomplished by using interchangeable modular
subcomponents.
The Alliance(R) family of hip systems is designed to address the growing trend
among hospitals and surgeon groups toward standardization of total hip systems.
The Alliance(R) hip family provides the largest selection in the marketplace of
primary and revision stems available for implantation with a single set of
instrumentation. The Alliance(R) family of hip systems includes the Integral(R),
Bi-Metric(R), Answer(R), Hip Fracture(TM), Rx90(R), Osteocap RS(R),
Vision(R) and Progressive(TM) Hip Systems. During the second quarter of fiscal
year 2002, Biomet Orthopedics plans to introduce a newly designed and integrated
instrument set. Exact(TM) Instrumentation was developed to address the needs of
today's orthopedic community by promoting intraoperative flexibility and
increasing the efficiency, simplicity and consolidation of instrument use.
During fiscal year 2001, the Company launched the M(2)a(TM), metal-on-metal
hip system. This hip system combines a cobalt chrome head with a cobalt chrome
liner to produce a hip system that could potentially demonstrate less wear
debris than conventional systems. In laboratory testing, the M(2)a(TM) System
has shown a 20 to 100-fold volumetric reduction in wear compared to conventional
polyethylene articulation systems. The M(2)a(TM) System may be utilized on
most of Biomet's femoral components and has continued to evolve with the
introduction of larger diameter metal-on-metal head components. Another advanced
hip articulation being developed by the Company is a ceramic-on-ceramic total
hip system, which began the patient-enrollment phase of a clinical trial during
the first quarter of fiscal year 2001.
SHOULDER SYSTEMS. The Company offers several shoulder systems including
the Bi-Angular(R)/Bi-Polar Shoulder System. The Bi-Polar humeral head is
marketed for use in primary cases of noninflammatory degenerative joint disease,
rheumatoid arthritis, correction of severe functional deformity and fracture.
The Bi-Angular(R)/Bi-Polar Shoulder System was
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the first FDA-cleared bi-polar shoulder in the United States. This system will
be enhanced through the introduction of the Absolute(TM) Bi-Polar Shoulder in
the second quarter of fiscal year 2002.
Since its introduction in 1987, the Bio-Modular(R) Total Shoulder System has
proven to be clinically effective and versatile, and is the Company's
largest-selling shoulder system. This system was designed to simplify the
shoulder replacement procedure and surpass the durability and clinical outcome
requirements of previous designs. The Bio-Modular(R) System is scheduled to be
expanded during fiscal year 2002 with the addition of increased humeral head
styles to address rotator cuff deficiencies and updated instrumentation.
The Copeland(TM) Humeral Resurfacing Head is scheduled to be released in the
United States during the first quarter of fiscal year 2002. With 10 years of
positive clinical results in the United Kingdom, the Copeland(TM) Head was
developed to minimize bone removal in shoulder cases involving adequate bone
quality and limited damage from trauma or osteoarthritis to the articular
cartilage and joint surface.
DENTAL RECONSTRUCTIVE IMPLANTS. 3i develops, manufactures and markets
products for oral rehabilitation through the replacement of teeth, in addition
to hard and soft tissues. These products include dental reconstructive implants
and related instrumentation, regenerative products and materials and bone
substitute materials. 3i's flagship product, the OSSEOTITE(R) dental implant
system, features a patented micro-porous surface technology, which allows for
earlier loading and improved bone integration to the surface of the implant
compared to competitive dental implants.
Recent additions to 3i's offerings of restorative treatment options include the
GingiHue(TM) Post and the ZiReal(TM) Post. The GingiHue(TM) Post is a
gold-colored titanium nitride coated abutment, which optimizes the projection of
natural color to approximate the appearance of natural teeth. The ZiReal(TM)
Post, introduced during fiscal year 2001, offers a highly aesthetic restorative
option. This zirconia-based implant provides the natural translucence of ceramic
material, but with greater strength, durability and resistance to cracking than
conventional aluminum oxide ceramic abutments. Both of these products may be
used with conventional crown and bridge techniques.
3i's Biogran(R) bone graft material is utilized in conjunction with dental
implant procedures. This synthetic granular material, which is used to initiate
bone growth in areas of defects, transforms into hollow calcium phosphate bone
growth chambers. These chambers provide an environment in which osteogenesis
(new bone growth) occurs. As the granules resorb, they are replaced by new bone.
The Platelet Concentrate Collection System ("PCCS(TM)"), introduced during
fiscal year 2000, is a custom-designed compact centrifuge system for the rapid
preparation of autologous platelet concentrate. The PCCS(TM) centrifuge
maximizes platelet concentration, yield and viability from a small sample of
blood. 3i recently received clearance from the FDA for use of the platelet
concentrate in bone grafting procedures.
In April 2001, 3i announced a strategic alliance with Colbar Research &
Development, Ltd. ("Colbar") located in Ramat-Hasharon, Israel. Founded in
1994, Colbar is a privately-held company that focuses on the development of
biotechnology products. Colbar developed a unique, patented technology for the
production of the Ossix(TM) collagen-based product, to which 3i now holds the
exclusive worldwide distribution rights. The Ossix(TM) material is a resorbable
collagen membrane used in guided bone regeneration, which offers superior
handling characteristics and predictable clinical outcomes. The Ossix(TM)
membrane resists degradation for a full six months, and then gradually resorbs
within eight to ten months.
OTHER RECONSTRUCTIVE DEVICES. Biomet's Patient-Matched Implant
("PMI(R)") services group expeditiously designs, manufactures and delivers
one-of-a-kind reconstructive devices to orthopedic specialists. The Company
believes this service continues to enhance Biomet's reconstructive sales by
strengthening its relationships with orthopedic surgeons and augmenting its
reputation as a responsive company committed to excellent product design. In
order to assist orthopedic surgeons and their surgical teams in preoperative
planning, Biomet's PMI(R) group utilizes a three-dimensional ("3-D") bone and
soft tissue reconstruction imaging system. A patented technology owned by the
Company allows the use of Computed Tomography ("CT") data to produce 3-D
reconstructions for the design and manufacture of patient-matched implants.
Biomet also provides anatomic physical models based on patient CT data. With
this imaging and model-making technology, Biomet's PMI(R) group is able to
assist the physician prior to surgery by creating 3-D models. Within strict
deadlines, the model is used by engineers to create a PMI(R) design for the
actual manufacturing of the custom implant for the patient. Biomet continues to
advance the application of imaging technology for the design and production of
reconstructive devices for various joints in the body.
The Company is involved in a variety of research projects involving bone cements
and delivery systems. Currently, the Company sells bone cements, such as
Palacos(R) Refobacin and Palamed(R) G, principally in Europe. On June 1,
2000, Biomet began selling Palacos(R) Bone Cement in the United States.
Additionally, the Company is awaiting FDA clearance for the Generation 4(R)
Bone Cement System. The system provides acrylic bone cement in a pre-packaged,
vacuum-sealed pouch--known as the Vac Pac(R)--
Ossix(TM) is a trademark of Colbar Research & Development, Ltd.
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for contained mixing and delivery. This patented system is designed to offer the
surgeon ease of use, a lower incidence of waste, consistent cement preparation
and reduced exposure to irritating monomer vapors.
Bone cements and accessories marketed by the Biomet Merck Joint Venture include
the Palamed(R) and Copal(TM) bone cements and the Palamix(R) Bone Cement
Mixing System. Palamed(R) Bone Cement demonstrates improved handling and rapid
setting characteristics. Copal(TM) bone cement incorporates a combination of
Gentamicin and Clindamicin antibiotics into its formula and is especially
effective in revision reconstructive procedures. The Palamix(R) System
consists of a pre-packaged bone cement mixing and delivery system for precise
application of the cement in reconstructive procedures. The Company also markets
the Optivac(R) Vacuum Bone Cement mixing and delivery system. This system
provides a simple and effective means for mixing and delivering bone cement to
the surgical site. Although it is primarily marketed for use with Palacos(R)
Bone Cement, it can be used with other bone cements.
During fiscal year 2002, Biomet Orthopedics plans to launch the Discovery(TM)
Elbow System, a total elbow replacement system incorporating the Company's
patented ArCom(R) polyethylene in its molded bearing. The hinge mechanism in
the Discovery(TM) Elbow reduces the mechanical stresses observed in
simple-hinged elbow implants.
FIXATION PRODUCTS
The Company's fixation products include electrical stimulation devices that do
not address the spine, external fixation devices, craniomaxillofacial fixation
systems, internal fixation devices and certain bone substitute materials.
ELECTRICAL STIMULATION DEVICES. EBI is the market leader in the
electrical stimulation segment of the fixation market. The EBI Bone Healing
System(R) is a non-invasive device used in the treatment of recalcitrant bone
fractures (nonunions) which have not healed with conventional surgical and/or
non-surgical methods. In 1998, the FDA revised the definition of "nonunions,"
which are now defined as fractures with no visibly progressive signs of healing.
Previously, a nonunion could not be established until nine months had elapsed
with no signs of healing. In fiscal year 2000, the Health Care Financing
Administration ("HCFA") revised its policy covering electrical stimulation
therapy for fractures. Previously, HCFA covered electrical stimulation treatment
only after six or more months had elapsed without the fracture showing visible
signs of healing. This new policy allows for reimbursement for electrical
stimulation therapy three months after a fracture has occurred. The non-invasive
devices sold by EBI generally provide an alternative to surgical intervention in
the treatment of recalcitrant bone fractures, failed joint fusions and
congenital pseudarthrosis.
The EBI Bone Healing System(R) units produce low-energy pulsed electromagnetic
field ("PEMF") signals that induce weak pulsing currents in living tissues that
are exposed to the signals. These pulses, when suitably configured in amplitude,
repetition and duration, affect bone cells. EBI's non-invasive stimulator has
two components: a treatment head and the control unit. The treatment head
contains an electrical coil that is connected to the control unit. The control
unit transforms household current or battery power into a predetermined sequence
of pulsed currents that are induced into the fracture site through the treatment
head, which may be placed over a patient's cast, incorporated into the cast or
worn over the skin.
EBI introduced the EBI Bone Healing System(R) Model 2001, a newly-designed,
lighter and more patient-friendly model, during the fourth quarter of fiscal
year 1999. The EBI Bone Healing System(R) Model 2001 utilizes household
current, or a rechargeable power supply, which allows for complete patient
ambulation during treatment. This model usually incorporates the treatment coil
into the patient's cast, but the coil can be worn over the skin, if required.
The coil design is capable of treating the vast majority of nonunion fracture
locations. The Model 2001 is a small, lightweight and easy-to-use unit, which
was designed to encourage patient compliance and enhance clinical success.
EBI also manufactures the FLX(R) Flexible Treatment Coils for use with the EBI
Bone Healing System(R) Model 2001. The FLX(R) Flexible Treatment Coils are
lightweight and provide a slim profile that enhances patient comfort and
compliance during bone healing treatment regimens. Additionally, EBI offers a
series of coils to address shoulder, foot, ankle, clavicle and metatarsal site
applications and an elliptical coil to be used with external fixation systems.
EBI's OsteoGen(TM) Totally Implantable Bone Growth Stimulator is an adjunct
treatment when bone grafting and surgical intervention are required to treat a
recalcitrant fracture. During fiscal year 2001, EBI expanded this product line
by launching the OsteoGen D(TM) in both straight and mesh cathodes. This
device has dual leads/cathodes and twice as much current as previous models
making it a preferred treatment option for large fractures with multiple surface
areas.
The Company's acquisition of Biolectron, Inc. in September 2000, added the
OrthoPak(R) Bone Growth Stimulation System to EBI's bone growth stimulator
line. The OrthoPak(R) System, which was approved by the FDA in 1986, is a
small, lightweight non-invasive bone growth stimulator using capacitive coupling
technology.
Palacos(R), Palamed(R) and Palamix(R) are registered trademarks
of Hereaus Kulzer GmbH.
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EXTERNAL FIXATION DEVICES. External fixation is generally indicated to
immobilize fractures when traditional casting is not a viable solution. Since
its launch during fiscal year 1996, the DynaFix(R) External Fixation System has
received positive market acceptance and it is currently one of the leading
external fixation systems in the United States. The DynaFix(R) System is a
patented device for use in complicated trauma situations and in certain
limb-lengthening and deformity correction applications.
EBI released several new external fixation products in fiscal year 2001. The
WristFix(TM) Distal Radius Wrist Fixator is a sterile-packaged, single-use
radiolucent fixator designed to address less complicated distal radius
fractures. The DynaFix(R) System was expanded by the addition of various new
deformity clamps that allow for corrective osteotomies. EBI also introduced the
OptiROM(R) Elbow Fixation System, a unilateral system that provides controlled
range of motion for treating unstable elbows, and the Vision(TM) System
components, which enhance the capabilities of the OptiROM(R) System.
CRANIOMAXILLOFACIAL FIXATION SYSTEMS. The Company manufactures and
distributes craniomaxillofacial and neurosurgical titanium and resorbable
implants, along with associated surgical instrumentation, principally marketed
to craniomaxillofacial, neurosurgical and craniofacial surgeons through its
subsidiary, Walter Lorenz Surgical, Inc. ("Lorenz Surgical"). Lorenz Surgical
also offers specialty craniomaxillofacial surgical instruments, Hard Tissue
Replacement (HTR(R)) custom craniofacial implants and the Mimix(TM) Bone
Substitute Material for use in craniomaxillofacial surgery.
Lorenz Surgical manufactures and markets resorbable plate and screw systems for
craniomaxillofacial surgery in the United States, the European community, the
Pacific Rim, Canada, South America and South Africa. The LactoSorb(R)
Craniomaxillofacial Fixation System is a copolymer of poly-L-lactic acid and
polyglycolic acid. As a result of its innovative design, the LactoSorb(R)
System is comparable in strength to titanium plating systems at its initial
placement and is completely resorbed within 9 to 15 months after implantation.
Market response for the LactoSorb(R) System has been positive, especially in
pediatric reconstruction cases by eliminating the need for a second surgery to
remove the plates and screws. Lorenz Surgical intends to continue to expand and
enhance its line of LactoSorb(R) Resorbable Implants.
Mimix(TM) Bone Substitute Material is a synthetic tetra-calcium
phosphate/tri-calcium phosphate material. This material is most commonly used
for the repair of neurosurgical burr holes, craniotomy cuts and other cranial
defects, but also can be utilized in the restoration, or augmentation, of bony
contours in a craniofacial skeleton. Mimix(TM) Bone Substitute Material offers
optimal handling properties and achieves 90% of compressive strength during the
first hours of setting. To expand its offerings of biomaterial products, Lorenz
Surgical has signed an exclusive distribution agreement to distribute an
osteoinductive demineralized bone matrix. This product is expected to be
launched during the second quarter of fiscal year 2002.
During fiscal year 2001, Lorenz Surgical extended its comprehensive product line
incorporating distraction osteogenesis technologies for the face. These titanium
and LactoSorb(R) SE resorbable devices are designed to be utilized in
lengthening procedures for pediatric congenital defects of the craniofacial
skeleton.
The Lorenz Total TMJ Replacement System ("Lorenz TMJ") is a joint replacement
product for the treatment of patients with temporomandibular joint syndrome.
This product has received positive market response in Argentina, Australia,
Brazil, England, South Africa and Sweden. In the second quarter of fiscal year
2002, the Lorenz TMJ will be introduced in Germany, Italy and Spain. Regulatory
approval for the Lorenz TMJ is currently in process in the United States where
this product is in the sixth year of a clinical trial approved by the FDA.
Lorenz Surgical anticipates receiving 510(K) clearance from the FDA during
fiscal year 2002 to introduce a unique resorbable cranial flap fixation system.
This two-sided cranial flap fixation device will incorporate the
clinically-proven LactoSorb(R) resorbable material.
INTERNAL FIXATION DEVICES. The Company's internal fixation products
include devices such as nails, plates, screws, pins and wires designed to
temporarily stabilize traumatic bone injuries. These devices are used by
orthopedic surgeons to provide an accurate means of setting and stabilizing
fractures. They are intended as aids to healing and may be removed when healing
is completed; they are not intended to replace normal body structures.
The Uniflex(TM) Nailing System, which is the Company's largest-selling
internal fixation system, addresses a wide range of fractures utilizing one
product system. The Uniflex(R) Femoral Nailing System is used for internal
fixation of femoral fractures. The flexibility of the system enhances the load
transfer to the bone to further aid in the healing of the fracture. The
Unifiex(TM) Nailing System also includes tibial and humeral nailing systems.
In addition, the S.S.T.(R) Small Bone Locking Nail and the Vector(TM)
Intertrochanteric Nail, a compression nailing system, enhance the Company's
intramedullary fracture fixation family. Other internal fixation products
experiencing attention in the marketplace are the Biomet(R) Ankle Arthrodesis
Nail, the Low Profile Tibial Nail and the ReUnite(TM) resorbable products for
foot, ankle and hand applications.
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The Compression Hip Screw System was designed to provide strong and stable
internal fixation for a variety of intertrochanteric, subtrochanteric and
basilar neck fractures. The Vari-Angle Hip Fixation System (VHS(R)) is a
unique compression hip screw, which allows the hospital to carry less inventory,
while providing greater intraoperative selection of the optimum fixation angle.
During fiscal year 2001, the Company introduced the VHS(R) Supracondylar Cable
Plate, which is designed for internal fixation of distal femoral and
subtrochanteric fractures. The BMP(TM) Cable and Cable Plate System are used
intraoperatively, often as part of revision hip surgery, to reduce the risk of
fracture or to repair existing femoral fractures. System-specific
instrumentation for the BMP(TM) Cable System is precise and allows
reproducible results. Another addition to the Company's internal fixation
product line is the Ally(TM) Monofilament Cerclage System, which offers the
surgeon a monofilament wire option for cerclage in fracture repair or revision
surgery.
BONE SUBSTITUTE MATERIALS. When presented with a patient with a bony
defect, such as a fractured bone or bone loss due to removal of a tumor, the
treating surgeon may remove a portion of bone from the patient to use as a graft
to induce healing at the site of the defect. Bone substitute materials can
eliminate the pain created at the graft site, as well as the costs associated
with this additional surgical procedure. Depending on the specific use of the
bone substitute material, it can have reconstructive, fixation or spinal
applications.
The Company is engaged in several bone substitute material projects. Among those
projects is Endobon(R) Bone Substitute, a material with interconnecting
porosity available in indication-specific shapes. This material is free of
organic components due to the sintering process, which converts it into a
non-resorbable ceramic material designed for long-term stability after
implantation. The Endobon(R) material has regulatory approval in Europe and
has been approved for certain dental indications in the United States.
The Company is also developing a resorbable calcium-deficient hydroxyapatite
bone substitute material, currently referred to as Biocement D(TM). This
material exhibits a slower resorption profile and offers higher strength in
comparison to other resorbable compounds. In addition, the Company is developing
novel bone graft substitute materials, including Calcigen(TM) S (calcium
sulfate) bone substitute and Calcigen(TM) NaP (calcium sodium phosphate) bone
substitute. Both products are involved in ongoing pre-clinical studies for
orthopedic indications and are not yet approved in the United States. During the
third quarter of fiscal year 2001, these bone substitute materials were
introduced in Europe and Canada.
SPINAL PRODUCTS
Spinal products include electrical stimulation devices for spinal applications
and spinal fixation systems.
SPINAL FUSION STIMULATION SYSTEMS. Implantable, direct-current electrical
stimulation devices provide an adjunct to surgical intervention in the treatment
of spinal fusion applications. Spinal fusions are surgical procedures undertaken
to establish bony union between adjacent vertebrae. EBI's SpF(R) Implantable
Spinal Fusion Stimulators are used in conjunction with bone grafting to increase
the probability of fusion success. The implantable devices each consist of a
generator that provides a constant direct current to a titanium cathode placed
where bone growth is required. The SpF(R)-T Implantable Spinal Fusion
Stimulator incorporates a telemetry device which emits a signal to allow device
monitoring after implantation. The compact design of the SpF(R)-T stimulator
provides easier surgical implantation and explantation while increasing patient
comfort. EBI's SpF(R)-XL stimulator is designed to address multilevel fusions
of three to five levels. The XL model has longer leads and delivers 40 micro
amps of output. The XL line has been expanded to include several enhancements,
such as the SpF(R)-XLII Spinal Fusion Stimulator, which provides the same
benefits as the XL model, in a two-lead configuration; the SpF(R)-XLIIB Spinal
Fusion Stimulator, a miniature version of the SpF(R)-XLII stimulator; and the
SpF(R) Mesh Cathode, which is designed to increase the contact area between
the bone graft site and the host bone. EBI intends to continue to expand the
line of SpF(R) Spinal Fusion products in fiscal year 2002.
The Company's acquisition of Biolectron, Inc. in September 2000 provided EBI
with the SpinalPak(R) Spine Fusion Stimulation System. The SpinalPak(R)
System offers surgeons a patient-friendly device for situations in which
non-invasive stimulation is the appropriate option.
SPINAL FIXATION SYSTEMS. EBI's SpineLink(TM) Spinal Fixation System
addresses many of the inherent drawbacks of traditional rod and plate systems.
With the SpineLink(TM) System, each spine segment is addressed individually for
intrasegmental control. Through the use of a modular titanium link and
polydirectional screw, this unique system provides an intrasegmental solution to
spine fixation, enabling the surgeon to tailor the segmental construction to the
patient's anatomy. The SpineLink(TM) System optimizes accessibility to the bone
graft site while increasing the volume of graft that can be used in spinal
fusion surgery. The SpineLink(TM) System was enhanced with the addition of
SpineLink(TM) Cervical Fixation System addressing the cervical region of the
spine.
VHS(R) is a registered trademark of Implant Distribution Network, Ltd.
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EBI fully released the Omega 21(TM) Spinal Fixation System in the United
States during fiscal year 2000. This system augments EBI's domestic spinal
fixation product line by offering its customers a traditional rod and screw
system. EBI has continued to augment the Omega 21(TM) Spinal Fixation System
with new components, including expandable screws. During fiscal year 2001, EBI
introduced the VueLock(TM) Anterior Cervical Plate System, which is a titanium
alloy system featuring a unique, open design that allows for enhanced
intra-operative and post-operative visualization of the bone graft site. In
fiscal year 2002, EBI plans to continue to expand its array of spinal fixation
products.
OTHER PRODUCTS
The Company also manufactures and distributes several other products including
orthopedic support devices (also referred to as softgoods and bracing products),
arthroscopy products, operating room supplies, casting materials, general
surgical instruments, wound care products and other surgical products. EBI
manufactures and distributes an extensive line of orthopedic support products
under the EBI(R) Sports Medicine trade name. The Company manufactures and
markets a line of arthroscopy products through its Arthrotek, Inc. ("Arthrotek")
subsidiary.
ORTHOPEDIC SUPPORT DEVICES. EBI distributes a line of orthopedic support
devices under the EBI(R) Sports Medicine name, including traction framing
equipment, back supports, wrist and forearm splints, cervical collars, shoulder
immobilizers, slings, abdominal binders, knee braces and immobilizers, rib
belts, ankle supports and a variety of other orthopedic splints. Sales of these
softgoods and bracing products are assisted by the Support-on-Site (S.O.S.(TM))
stock and bill program, which efficiently handles the details of product
delivery for the healthcare provider.
ARTHROSCOPY PRODUCTS. Arthroscopy is a minimally-invasive orthopedic
surgical procedure in which an arthroscope is inserted through a small incision
to allow the surgeon direct visualization of the joint. This market is comprised
of five product categories: power instruments, manual instruments, visualization
products, soft tissue anchors, and procedure-specific instruments and implants.
Arthrotek's principal products consist of the WasherLoc(TM) Tibial Graft
Fixation Device, the PowerPump(R) 800 Endoscopic Visualization System and
accompanying cassettes, the Harpoon(R) Soft Tissue Anchor System, the Bone
Mulch(TM) Screw, manual instruments, the IES(R) 1000 System, LactoSorb(R)
resorbable arthroscopic fixation products and the CurvTek(R) Bone Tunneling
System. The IES(R) 1000 System is a fully-integrated arthroscopy system
consisting of a camera, light source, shaver, pump, monitor, printer and VCR
contained in a pre-wired cart. The PowerPump(R) 800 System provides surgeons
with the ability to independently control flow and pressure and to use the pump
in conjunction with other arthroscopy shaver systems.
During fiscal year 2001, Arthrotek introduced additional products in the line of
LactoSorb(R) resorbable arthroscopic fixation products such as the
LactoScrew(TM) Anchor, the Meniscus Screw, the RC Pop Rivet and the Revision
Gentle Threads(TM) Interference Screw, to address shoulder and knee soft
tissue repair indications. Arthrotek intends to continue to expand the line of
LactoSorb(R) resorbable arthroscopic products.
During fiscal year 2001, Arthrotek procured the CurvTek(R) Bone Tunneling
System as a result of the Company's acquisition of Biolectron, Inc. This unique
system is designed to create curved tunnels in bone for suture tie-down in the
reattachment of soft tissues to bone in shoulder and hip procedures.
OPERATING ROOM SUPPLIES. The Company's principal products in the
operating room supplies category are surgical suction devices, filters, glove
liners and drapes. The Redi-Vacette(R) Closed Wound Suction System provides
post-operative wound suction drainage following surgical procedures. The
Redi-Flow(R) Filter automatically strains the flow of body liquids during
surgery. The filter collects fine bone chips and tissue for subsequent
pathological evaluation and saves operating room time by reducing suction clogs
during surgical procedures. The Redi-Drape(R) protects the sterile operating
field from contamination, and provides a drainage bag and built-in instrument
pouches to assist the surgeon.
CASTING MATERIALS. EBI's SynthoCast(TM) HP (high performance) casting
material is lighter, stronger and more comfortable than conventional plaster
products. The SynthoCast(TM) tape offers pre-cut splints on a roll, which
saves time, controls waste and improves convenience for the patient and
physician. EBI has introduced an improved version of the SynthoCast(TM) HP
casting tape, which is uniquely designed to provide improved conformability and
faster setting capabilities.
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PRODUCT DEVELOPMENT
For the years ended May 31, 2001, 2000 and 1999, the Company expended
approximately $43,020,000, $40,208,000 and $38,723,000, respectively, on
research and development. It is expected that ongoing research and development
expenses will continue to increase. The Company's principal research and
development efforts relate to its reconstructive devices, electrical stimulation
products, spinal fixation products, revision products, dental reconstructive
implants, arthroscopy products, resorbable technology, biomaterials products and
gene therapy technologies in the musculoskeletal products field. The Company's
primary research and development facilities are located in Warsaw, Indiana;
Parsippany, New Jersey; and Darmstadt, Germany.
The Company's research and development efforts contributed to the introduction
in fiscal year 2001 of numerous new products, including the following products:
M(2)a(TM)-RingLoc Liner Options, PLR(TM) Proximal Loading Revision Hip
System, Patriot(TM) Modular Acetabular Cage, Biomet(R) Offset Tibial System,
Biomet(R) Oncology/Salvage System, Exceed(TM) Acetabular Cup, Scan
Classic(TM) II Hip System, Stanmore(TM) Long Hip Stem, Advantage(R) Hip
Cup, Aura II(R) Hip Stem, Eternity(R) Ceramic-on-Ceramic Hip Cup, Dual
Articular 2000 Knee System, Rotating Hinge Knee, Alpina(R) Anterior/Posterior
Stabilized Knee System, Oxford(R) Unicompartmental Knee Phase 3, Liverpool
Radial Head Replacement, FD Femoral Nail, Bio-Drive Cannulated Screws, Topkin
wound dressing, EBI Bone Healing System(R) Model 1026, EBI OsteoGen(TM)-D
40/M Mesh Cathode and EBI OsteoGen(TM)-D 40/S Straight Cathode, Wristfix
Distal Radius Fixator, deformity clamps for the DynaFix Rail System, Simple
Logic(TM) System, LactoSorb(R) Alveolar Distractor, LactoSorb(R) Ethmoid
Stent, LactoSorb(R) LeFort III Distractor, the Lorenz TMJ Replacement System,
LactoScrew(TM) Anchor, Meniscus Screw, the RC Pop Rivet and Revision Gentle
Threads(TM) Interference Screw.
During fiscal year 2002, the Company intends to release many new products,
including the following products: Exact(TM) Hip Instrumentation,
Calcigen(TM) NaP bone substitute, the Copeland(TM) Humeral Resurfacing Head,
Bio-Modular(R) Choice Shoulder System, Absolute(TM) Bi-Polar Shoulder,
expansions to the Bio-Modular(R) Total Shoulder System, the Discovery(TM)
Elbow System and EBI's custom ACL Knee Brace.
EBI conducts a program of research and development intended to maintain its
proprietary position and to expand the range of indications for its electrical
stimulation products. This program includes clinical investigations and funding
of basic research to study cells and simple biological systems. Typically, EBI
receives proprietary rights with respect to the data developed as the result of
research it sponsors. EBI also conducts similar research programs for all of its
products.
In 1999 the Company formed an alliance with Selective Genetics, Inc. ("Selective
Genetics") to develop gene therapy products for musculoskeletal repair
indications. Selective Genetics specializes in tissue repair and regeneration by
utilizing technologies for local gene transfer in any type of wound repair
environment. This alliance will provide the Company with an exclusive, worldwide
license covering the application of Selective Genetics' Gene Activated Matrix
("GAM(TM)") material for musculoskeletal repair indications including spinal
fusion, fracture repair, bone void filling, tendon repair and ligament repair
and a non-exclusive license for use of the GAM(TM) material with spine cages.
Efforts are currently concentrated on the completion of pre-clinical studies to
support a clinical trial for a product addressing acute tibial fractures. The
Company also made a minority equity investment in Selective Genetics, as more
fully described in Note C of the Notes to Consolidated Financial Statements.
GOVERNMENT REGULATION
Most aspects of the Company's business are subject to some degree of government
regulation in the countries in which its operations are conducted. The Company's
policy is to comply fully with all regulatory requirements applying to its
products and operations. For some products, and in some countries, government
regulation is significant, and, in general, there appears to be a trend toward
more stringent regulation throughout the world. The Company devotes significant
time, effort and expense addressing the extensive government and regulatory
requirements applicable to its business. Governmental regulatory actions can
result in the recall or seizure of products, suspension or revocation of the
authority necessary for the production or sale of a product, and other civil and
criminal sanctions.
In the United States, the development, testing, marketing and manufacturing of
medical devices - such as arthroscopy, reconstructive, electrical stimulation,
spinal and internal fixation devices, bone cements and bone substitute materials
- - are regulated under the Medical Device Amendments of 1976 to the Federal Food,
Drug and Cosmetic Act (the "1976 Amendments") and additional regulations
promulgated by the FDA and various other federal, state and local agencies. In
general, these statutes and regulations require that manufacturers adhere to
certain standards designed to ensure the safety and effectiveness of medical
devices.
Under the 1976 Amendments, each medical device manufacturer must be a
"registered device manufacturer" and must comply with regulations generally
applicable to labeling, quality assurance, manufacturing practices and clinical
investigations
GAM(TM) is a trademark of Selective Genetics, Inc.
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involving humans. The FDA is authorized to obtain and inspect devices, their
labeling and advertising, and the facilities in which they are manufactured in
order to assure that a device is not improperly manufactured or labeled. All of
the Company's manufacturing and assembly subsidiaries are registered with the
FDA.
In addition, the sale and marketing of medical devices are regulated by the FDA
under the 1976 Amendments, which classify medical devices based upon the degree
of regulation deemed appropriate and necessary. A device is classified as a
Class I, II or III device based on recommendations of advisory panels appointed
by the FDA. Class I devices are subject to general controls. Class II devices,
in addition to general controls, are subject to additional controls. Class III
devices require FDA premarket approval before they may be distributed, other
than in clinical trials.
The Company's reconstructive and fixation products are regulated as Class I,
Class II or Class III medical devices. The Company's spinal fixation systems and
bone cement are regulated as Class II or Class III medical devices. The
Company's electrical stimulation products are regulated as Class III medical
devices. The procedure for obtaining approval to commercially market a Class II
device involves the submission of a premarket notification under Section 510(k)
of the 1976 Amendments. If the FDA determines that the device is substantially
equivalent to a pre-enactment device or to a device subsequently classified in
Class I or Class II, it will grant clearance to commercially market the device.
If the FDA determines the device is not substantially equivalent to a
pre-enactment device, it is automatically placed into Class III, and will either
require reclassification or the submission of valid scientific evidence to prove
the device is safe and effective for human use. For Class III medical devices,
in order to conduct clinical trials, the manufacturer must submit to the FDA an
application for an Investigational Device Exemption ("IDE"). An approved IDE
exempts the manufacturer from certain otherwise applicable FDA regulations, and
grants approval for a clinical investigation, or human study, to generate
clinical data to prove the safety and efficacy of a device. When a manufacturer
believes that sufficient clinical data has been generated to prove the safety
and efficacy of the device, it may submit a premarket approval application
("PMA") to the FDA. The FDA reviews the PMA and determines whether it is in
fileable form and all key elements have been included. Following acceptance of
the PMA, the FDA continues its review process, which includes submission of the
PMA to a panel of experts appointed by the FDA to review the PMA and to
recommend appropriate action. The panel then recommends that the PMA be
approved, not approved or approved subject to conditions. The FDA may act
according to the panel's recommendations, or it may overrule the panel. In
approving a PMA, the FDA may require some form of post-market surveillance
whereby the manufacturer follows certain patient groups for two or more years,
making periodic reports to the FDA.
In addition, the possibility exists that certain devices marketed prior to 1976,
or devices substantially equivalent thereto, may require premarket approval if
the FDA requests. In this event, the manufacturer will be required to submit
proof of safety and efficacy for these devices within 90 days of the call for a
PMA.
The Safe Medical Device Act of 1990 (the "1990 Act") affects medical device
manufacturers in several areas, including post-market surveillance and device
tracking procedures. The 1990 Act was the first major change to the Federal
Food, Drug and Cosmetic Act since the 1976 Amendments. The 1990 Act gave the FDA
expanded emergency recall authority, required that a summary be made available
of the safety and effectiveness of devices in the 510(k) process, and added
design controls as a requirement of Good Manufacturing Practices. The 1990 Act
also granted the FDA the authority to require manufacturers to conduct
post-market surveillance on most permanent implants and devices that potentially
present a serious risk to human health. Management does not believe the 1990 Act
has had a material adverse effect on the Company or its operations.
On November 21, 1997 the FDA Modernization Act (the "Modernization Act") was
signed into law. The Modernization Act amended the Food, Drug and Cosmetic Act
in an effort to streamline the process of bringing safe and effective drugs,
medical devices and other therapies to the United States market. With respect to
medical devices, the Modernization Act requires the FDA to focus its resources
on the regulation of those devices that pose the greatest risk to the public and
offer the most significant benefits. The FDA must base its decisions on clearly
defined criteria and provide for appropriate interaction with the regulated
industry. The Modernization Act assumes that an enhanced collaboration between
the FDA and the regulated industry will accelerate the introduction of safe and
effective devices to the United States marketplace.
The Company is well-positioned to face the changing international regulatory
environment. The ISO 9000 series of standards is an internationally recognized
set of standards aimed at ensuring the design and manufacture of quality
products. A company that has passed an ISO audit and obtained ISC registration
is internationally recognized as having quality manufacturing processes. The
European Union requires that medical products bear a CE mark. The CE mark is an
international symbol, which indicates that the product adheres to European
Medical Device Regulations. ISO 9000 certification is a requirement for placing
the CE mark on the Company's products. Each of the Company's manufacturing
and/or assembly facilities are authorized to place the CE mark on their
products.
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In addition to the regulatory requirements affecting the manufacture and
distribution of the Company's products addressed above, governmental bodies in
the United States and throughout the world have expressed concern about the
costs relating to health care, and in some cases, have focused attention on the
pricing of medical devices. Government regulation regarding pricing of medical
devices already exists in some countries and may be expanded in the United
States and other countries in the future. The Company is subject to increasing
pricing pressures worldwide as a result of growing regulatory pressures, as well
as the expanding predominance of managed care groups and institutional and
governmental purchasers.
While the Company is unable to predict the extent to which its business may be
affected by future regulatory developments, it believes that its substantial
experience in dealing with governmental regulatory requirements and restrictions
throughout the world, its emphasis on efficient means of distribution and its
ongoing development of new and technologically-advanced products should enable
it to continue to compete effectively within this increasingly regulated
environment.
Although the regulatory requirements affecting the Company continue to increase,
it has always been the practice of the Company to comply with all regulatory
requirements governing its products and operations and to conduct its affairs in
an ethical manner. This practice is reflected in the Company's code of conduct
and the responsibility of the Audit Committee of the Board of Directors to
review the Company's systems of internal control, its process for monitoring
compliance with laws and regulations and its process for monitoring compliance
with its code of conduct.
SALES AND MARKETING
Reconstructive devices marketed by Biomet Orthopedics, Inc. are distributed in
the United States by a salesforce of approximately 440 persons, encompassing
approximately 90 independent commissioned sales representatives ("distributors")
and over 350 sales associates engaged principally in the business of supplying
orthopedic products to hospitals in their geographic areas. A few of these
distributors have formal contractual arrangements which limit the Company's
right to terminate the distributor and provide certain long-term benefits to the
distributor upon termination. Internationally, Biomet Orthopedics' products are
marketed through independent, commissioned sales representatives in Australia
and Canada; primarily through direct sales representatives in Argentina, Chile,
Costa Rica, Japan, Mexico, New Zealand and Puerto Rico; and through independent
distributors and specialty medical product dealers in other international
markets. The Company's products are distributed in approximately 100 countries
worldwide.
EBI products are distributed in the United States through the Company's
wholly-owned subsidiary, EBI, L.P., an Indiana limited partnership with offices
in Parsippany, New Jersey. EBI maintains a predominately direct salesforce of
approximately 422 people in assigned territories throughout the United States.
EBI products are also distributed through a growing distribution network in
Central and South America, Canada, Asia and Europe.
3i distributes its products through a direct sales force consisting of
approximately 100 salespersons in assigned territories in the United States,
Brazil, Canada, Denmark, France, Germany, Mexico, Scandinavia, Spain,
Switzerland and the United Kingdom. Throughout the rest of the world, 3i
products are sold through a network of dedicated independent distributors.
Biomet Merck, the European joint venture formed between Biomet and Merck KGaA,
distributes its products primarily through a direct salesforce in Austria,
Belgium, the Czech Republic, Denmark, Finland, France, Greece, Holland, Italy,
Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Biomet Merck sells its products in other international markets primarily through
independent distributors.
Lorenz Surgical products are distributed in the United States through
approximately 90 independent, commissioned sales representatives and sales
associates engaged principally in the business of supplying craniomaxillofacial
products and surgical instruments to hospitals and surgeons in their geographic
areas. Additionally, Lorenz Surgical supplies a full line of hand-held
orthopedic surgical instruments for sale through the Biomet distribution
network. Lorenz Surgical products are marketed internationally through a growing
network of distributors and sales representatives and through direct operations
in Australia and Germany.
Arthrotek products are distributed in the United States primarily through
approximately 65 independent, commissioned sales representatives, 14 of whom are
devoted primarily to the representation of Arthrotek products. Arthrotek is
developing a salesforce of representatives who are well-trained and devote the
majority of their time selling Arthrotek products. Internationally, Arthrotek
products are marketed primarily through Biomet affiliate companies and a network
of distributors and sales representatives.
Elective surgery-related products appear to be influenced to some degree by
seasonal factors, as the number of elective procedures decline during the summer
months and the holiday seasons, with the exception of some elective pediatric
procedures scheduled to coincide with school breaks.
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Internationally, the Company's customers are the hospitals, surgeons, other
physicians and healthcare providers who employ its products in the course of
their practices. The business of the Company is dependent upon the relationships
maintained by its distributors and salespersons with these customers, as well as
the Company's ability to design and manufacture products that meet the
physicians' technical requirements at a competitive price.
For the fiscal years ended May 31, 2001, 2000 and 1999, the Company's foreign
sales were approximately $308,291,000, $311,289,000 and $279,392,000,
respectively, or 30%, 34% and 34% of net sales, respectively. During fiscal year
2001, foreign sales were reduced by $31.4 million due to foreign currency
translations. Additional data concerning net sales to customers, operating
income and long-lived assets by geographic areas are set forth in Note K of the
Notes to Consolidated Financial Statements included in Item 8 of this Report and
are incorporated herein by reference.
The Company consigns inventory throughout the world to its customers and to its
distributors and direct salespersons for their use in marketing its products and
in filling customer orders. As of May 31, 2001, inventory of approximately
$105,791,000 was consigned to these distributors, salespersons and customers.
Under Title VI of the Social Security Amendments of 1983 (the "1983
Amendments"), hospitals receive a predetermined amount of Medicare reimbursement
for treating a particular patient based upon the patient's type of illness
identified with reference to the patient's diagnosis under one or more of
several hundred diagnosis-related groups ("DRGs"). Other factors which affect a
specific hospital's reimbursement rate include the size of the hospital, its
teaching status and its geographic location. The Prospective Payment Assessment
Commission acts for Congress in evaluating, redefining and adjusting DRGs to
encompass technology changes and efficiencies experienced by hospitals. Biomet
Orthopedics products are primarily covered by DRG 209 (Major Joint and Limb
Reattachment Procedures-Lower Extremities) DRG 210 (Hip and Femur Procedures)
and DRG 491 (Major Joint and Limb Reattachment Procedures-Upper Extremities). To
date, the 1983 Amendments have not adversely affected the Company's
reconstructive device or electrical stimulation business. However, the future
impact of these amendments cannot be estimated at the present time. Biomet
products have also received approval for pass-through coding under the recently
enacted Hospital Outpatient Prospective Payment System.
COMPETITION
The business of the Company is highly competitive. Major competitors in the
reconstructive device segment include DePuy, Inc., a subsidiary of Johnson &
Johnson; Stryker Corp.; Zimmer, Inc., a subsidiary of Zimmer Holdings, Inc.;
Sulzer Orthopedics, Inc., a subsidiary of Sulzer Medica Ltd.; and Smith &
Nephew, Inc. Management believes these five companies, together with Biomet
Orthopedics, have the predominant share of the reconstructive device market.
Competition within the industry is primarily based on service and product
design, although price competition has become increasingly important in recent
years as providers have become more concerned with health care costs. The
Company believes that its prices for reconstructive devices are competitive with
those in the industry. The average selling prices in the United States of Biomet
Orthopedics' products have increased 2-3% over the past several quarters. The
Company believes its future success will depend upon its service and
responsiveness to its distributors and orthopedic specialists, and upon its
ability to design and market innovative and technologically-advanced products
that meet the needs of the marketplace.
EBI's spinal fixation systems compete with those of Interpore International,
Inc.; Stryker Spine, a division of Stryker Corporation; Medtronic/Sofamor Danek,
Inc., a subsidiary of Medtronic, Inc.; DePuy AcroMed Corporation, a subsidiary
of Johnson & Johnson; Synthes, Inc.; SpineTech, a subsidiary of Sulzer Medica
and others.
EBI's external fixation devices compete with other external fixation devices
primarily on the basis of ease of application and clinical results. EBI's
principal competitors in the external fixation market are Smith & Nephew
Richards, a division of Smith & Nephew PLC; Stryker Corp.; Synthes, Inc. and
Orthofix, Inc., a subsidiary of Orthofix International N.V. The Company's
internal fixation product lines compete with those of ACE Orthopedics, a
division of Johnson & Johnson; Zimmer, Inc., a subsidiary of Zimmer Holdings,
Inc.; Smith & Nephew PLC; and Synthes Inc.
3i products compete in the areas of dental reconstructive implants and related
products. Its primary competitors in the dental implant market include Nobel
Biocare AB, Straumann AG and Sulzer Orthopedics, Inc., a subsidiary of Sulzer
Medica Ltd.
EBI is the market leader in the bone growth stimulation market. EBI's electrical
stimulation products include implantable and non-invasive devices indicated for
spinal fusion applications and bone growth stimulation applications. The
invasive spinal fusion stimulation systems and bone growth stimulation products
are used as an adjunct to conventional surgical procedures to enhance the
success rates of these procedures. EBI's non-invasive bone growth stimulation
products are utilized in long-bone recalcitrant fractures as an alternative to
surgical procedures. Other companies offering products in the electrical
stimulation
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market include Orthofix, Inc., a subsidiary of Orthofix International N.V.;
OrthoLogic Corp.; and Exogen, Inc., a subsidiary of Smith & Nephew, Inc.
Competition in the electrical stimulation market is on the basis of product
design, service and success rates of various treatment alternatives. EBI's
non-invasive stimulators offer advantages over conventional surgery or invasive
products in that their use eliminates hospital, surgeon and operating room
costs, and these products can be used in the presence of infection without
creating a risk of additional infection. EBI's invasive stimulators offer the
advantage of conformance to surgical practice and do not require maintenance by
the patient.
Lorenz Surgical primarily competes in the craniomaxillofacial fixation and
specialty surgical instrumentation and neurosurgical cranial flap fixation
markets. Its competitors include Synthes Inc.; Stryker-Leibinger, a subsidiary
of Stryker Corp.; Bionx Implants, Inc.; Aesculap AG & Co.; ACE Surgical Supply
Company, Inc.; MacroPore, Inc.; KLS-Martin, L.P.; Osteomed Corp.; and Hu-Friedy
Dental.
Arthrotek products compete in the areas of power instruments, visualization
products, procedure-specific implants and instruments and manual instruments.
Competitors include Linvatec Corp., a subsidiary of CONMED Corporation; Bionx
Implants, Inc.; Stryker Corp.; Smith & Nephew Endoscopy, a division of Smith &
Nephew PLC; Arthrex, Inc.; and Olympus; Mitek, a division of Johnson & Johnson.
RAW MATERIALS AND SUPPLIES
The raw materials used in the manufacture of the Company's reconstructive
devices are principally nonferrous metallic alloys, stainless steel and
polyethylene powder. None of the Company's raw material requirements are limited
to any material extent by critical supply or single origins. However, suppliers
of polyethylene powder have become increasingly concerned due to perceived
product liability exposures in the medical device industry. Nonetheless, based
upon the Company's present relationship with such suppliers, a material shortage
of polyethylene powder is not anticipated in the foreseeable future. Also, the
demand for certain raw materials used by the Company, such as cobalt alloy and
titanium, is somewhat cyclical in nature. The primary buyers of these metallic
alloys are in the aerospace industry. If the demands of the aerospace industry
should increase dramatically, the Company could experience complications in
obtaining these raw materials. However, based on its current relationship with
its suppliers, the Company does not anticipate a material shortage in the
foreseeable future. Further, the Company believes that its inventory of raw
materials is sufficient to meet any short-term supply shortages of metallic
alloys.
EBI purchases all components of its electrical stimulators from approximately
250 outside suppliers, approximately 15 of whom are the single source of supply
for the particular product. In most cases, EBI believes that all components are
replaceable with similar components. In the event of a shortage, there are
alternative sources of supply available for all components, but some time would
likely elapse before EBI's orders could be filled. 3i purchases all materials to
produce its products from approximately 82 suppliers, approximately 21 of whom
are the single source of supply for the particular product. 3i believes that, in
the event of a shortage, there are alternative sources of supply for all
products and maintains an inventory of materials sufficient to meet any
short-term shortages of supply. The results of the Company's operations are not
materially dependent on raw material costs.
EMPLOYEES
As of May 31, 2001, the Company's domestic operations (including Puerto Rico)
employed approximately 2,990 persons, of whom approximately 1,700 are engaged in
production and approximately 1,290 in research and development, sales,
marketing, administrative and clerical efforts. The Company's international
subsidiaries employ approximately 1,430 persons, of whom approximately 650 are
engaged in production and approximately 780 in research and development, sales,
marketing, administrative and clerical efforts. None of the Company's principal
domestic manufacturing employees are represented by a labor union. The
production employees at its Bridgend, South Wales facility are organized.
Employees working at the facilities in Darmstadt and Berlin, Germany; Valence,
France; and Valencia, Spain are represented by statutory Workers' Councils which
negotiate labor hours and termination rights. The Workers' Councils do not
directly represent such employees with regard to collective bargaining of wages
or benefits. The Company believes that its relationship with all of its
employees is satisfactory. The establishment of Biomet's domestic operations in
north central Indiana, near other members of the orthopedic industry, provides
access to the highly skilled machine operators required for the manufacture of
Biomet products. The Company's European manufacturing locations in South Wales,
England, France, Spain and Germany also provide good sources for skilled
manufacturing labor. EBI's Puerto Rican operations principally involve the
assembly of purchased components into finished products using skilled labor.
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PATENTS AND TRADEMARKS
Patents and other forms of intellectual property are taking on increased
importance in the musculoskeletal industry. Accordingly, management has placed
greater significance on patents and is taking steps to increase its acquisition
and protection of intellectual property rights. In addition, management is
actively enforcing its intellectual property rights consistent with strategic
objectives.
BIOMET, EBI, W'. LORENZ, AOA, 3i and ARTHROTEK are the Company's principal
registered trademarks in the United States, and federal registration has been
obtained or is in process with respect to various other trademarks associated
with the Company's products. The Company holds or has applied for registrations
of various trademarks in its principal foreign markets. Unless otherwise noted
in this Report, all trademarks contained herein are owned by Biomet, Inc. or one
of its affiliates.
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ITEM 2. PROPERTIES.
The Company has the following properties: