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A culture of continuous
improvement, urgency and accountability coupled
with a growth strategy to protect and grow its core Domestic Rehabilitation business,
accelerated the growth of its Regeneration business and increase the size of its
International business through geographic expansion and acquisitions, has dj Orthopedics
solidly positioned in the non-operative orthopedics market
Medical Equipment & Supplies
dj Orthopedics, Inc.
2985 Scott Street
Vista, CA 92083
Mr. Leslie H. Cross
President and CEO
Interview conducted by:
Walter Banks, Publisher
December 15, 2005
BIO OF PRESIDENT/CHIEF
Leslie H. Cross, 55, has been the Chief Executive Officer, President and a director of dj
Orthopedics, Inc. since its incorporation in August 2001. He served as the Chief Executive
Officer and a Manager of DonJoy, L.L.C., the predecessor of the Company, from June 1999
until November 2001, and has served as President of dj Orthopedics, LLC, the Company's
wholly-owned operating subsidiary, or its predecessor, the Bracing & Support Systems
division of Smith & Nephew, Inc. (the "BASS Division") since June 1995. From
1990 to 1994, Mr. Cross held the position of Senior Vice President of Marketing and
Business Development of the BASS Division. He was a Managing Director of two different
divisions of Smith & Nephew, Inc. from 1982 to 1990. Prior to that time, he worked at
American Hospital Supply Corporation. Mr. Cross earned a diploma in Medical
Technology from Sydney Technical College in Sydney, Australia and studied Business at the University
of Cape Town in Cape Town, South Africa.
dj Orthopedics is a global medical device company specializing in rehabilitation and
regeneration products for the non-operative orthopedic and spine markets. Marketed
under the DonJoy and ProCare brands, the Companys broad range of over 600
rehabilitation products, including rigid knee braces, soft goods and pain management
products, are used in the prevention of injury, in the treatment of chronic conditions and
for recovery after surgery or injury. The Companys regeneration products consist of
bone growth stimulation devices that are used to treat nonunion fractures and as an
adjunct therapy after spinal fusion surgery. Together, these products provide
solutions throughout the patients continuum of care. The Company sells its
products in the United States and in more than 40 other countries through networks of
agents, distributors and its direct sales force. Customers include orthopedic,
podiatric and spine surgeons, orthotic and prosthetic centers, third-party distributors,
hospitals, surgery centers, physical therapists, athletic trainers and other healthcare
professionals. For additional information on the Company, please visit www.djortho.com
CEOCFO: Mr. Cross, we last spoke two years ago, please tell
us about your position in the marketplace and any changes that have taken place in the
direction of your company?
Mr. Cross: dj Orthopedics is the largest publicly
traded orthopedics company that focuses exclusively on non-operative products. We think
that this is important, because when you think about the large orthopedic companies; the
metal companies, the companies that sell total hips and total knees; if you take the top
three or four players in that market, they make up about 75% market share. In our segment
if you take the top three or four players, they probably make up less than 50% market
share. Therefore, this is a much more fragmented industry, where we think that there is a
great opportunity to continue to grow our business through product line extensions and or
acquisitions, but staying out of the metals or orthopedics market. We still today have
over 600 products and since we last spoke two years ago, we made a strategic acquisition
that actually changed the growth and profitability profile of the Company. We acquired the
bone growth stimulation device business from OrthoLogic Corporation. This was a
significant acquisition for us in that we bought two products to accelerate bone healing
in patients. One is used when a patient is not achieving a union after a fracture; 90 days
after the fracture the patient is showing no signs of healing. Our device is used for 30
minutes a day externally, to treat the patient to accelerate the healing of the fracture.
The second device is used for a patient that is recovering from spinal fusion surgery,
which is one of the fastest growing surgical techniques today. About 20 to 30% of the
patients are at risk of not achieving this complete fusion because they possess certain
risk factors for proper healing. These risk factors could be cause by obesity, poor
bone density, smoking, diabetes, alcoholism, or some form of those factors. The surgeon
would prescribe our device to be used immediately post surgery, to accelerate the fusion.
A failed fusion is a big problem for everybody. So these are two new products and when we
bought the business it was about $43 million of revenue and is one of our fastest growing
segments now. In our financial reports we call it our Regeneration Division and we
actually do report the results in our filing. It is high margin, about 90% gross margin
and double digit growth; so its a very exciting product diversification for us. This
past August, we acquired the orthopedics soft goods business from Encore, which is a
diversified orthopedics company. Through that acquisition, we were able to add about 50 to
60 new products to our range, focusing in the area of patient safety devices and patient
positioning devices, as well as some cervical bracing and patented unique ankle bracing.
Hence, the company still continues to grow through accelerating our core rehab business
and doing these accretive tuck in acquisitions.
CEOCFO: And you see that as a growing segment of your
business over the years.
Mr. Cross: Absolutely, and the reason for it is that
with the aging population there will be more fractures and spinal fusion surgeries is
forecasted to be growing at around 8% a year, just the procedures itself. Therefore, we
think that will be a potent growth engine for our company as we go forward and if you look
at our results you will see the very positive impact that business has had on our results
over the last two year.
CEOCFO: Is your rigid
knee brace still your flagship product?
Mr. Cross: Our ACL knee brace, the DonJoy DefianceŽ
knee brace, DonJoy is the brand name, continues to be our flagship product that we sell to
the orthopedics surgeons. This year 24 of the 25 division one NCAA football programs wear
the Defiance to prevent injuries. It is still an important part of our business, but today
it is only about 30% of our business. Therefore, we really have increased our product
portfolio and diversified from being just a knee brace company.
CEOCFO: Is there any one product that makes up most of the
30% or is it a total diversification?
Mr. Cross: There are really three product categories in
our rigid knee bracing. First, we have the ligament knee bracing under the DonJoy brand,
which is used to protect the knee either from injury or after injury when the knee has
been reconstructed. The second area is osteoarthritis knee bracing, what we call OA
bracing, which allows the patient to delay surgery, not to have to take any
anti-inflammatory drug and still remain active. In the third rigid knee brace we have our
post-operative knee brace that is used immediately post surgery, to deliver a protected
range of motion. So you can see that we are diversified in that category as well.
CEOCFO: Where do most of your new products come from?
Mr. Cross: We really come up with new products three
ways; one is our own internal research and development, where we actually find a need in
the marketplace and design a product to meet that need. The second is surgeon inventors,
where a surgeon inventor will approach us with an idea because of our reputation. That
idea could be as simple as a drawing on a cocktail napkin or well thought-out, prototyped
and even patented device, so it covers that whole range. In the third area, new products
will come from enhancements to existing products. Therefore, it is a balanced approach. We
launched about 12 new products last quarter and it is about that same number every
quarter, between 8 and 15 new products. And that is through one of those three
CEOCFO: How do you reach potential customers, whether it is
the college football programs or orthopedic surgeons, and do you have business in
Mr. Cross: On our DonJoy knee brace brand, we focus on
the orthopedics sports medicine surgeon and we make sure that surgeon is aware of our
offering, our innovation and our quality, so when they seen a need for the product, we
will be their first choice. Each college team has a group of orthopedic surgeons who work
with the student athletes and they will work with them through the athletic trainer who is
employed by the University. Therefore, we reach into the Universities and the student
athlete through the orthopedic surgeons and the athletic trainer and that is how we get
We have another brand called, ProCare, which is our hospital brand and how our products
reach the acute primary care setting. In that area we have distribution partners; for
example Henry Schein, Cardinal Healthcare and others. They will be moving all of the
supplies that hospital requires, into the hospital and as part of that delivery they are
taking our products in under the ProCare label.
CEOCFO: Is your ProCare brand sold outside of the United
Mr. Cross: Our ProCare brand is sold mainly in the U.S.,
outside of the United States we focus mainly on the DonJoy brand.
CEOCFO: Tell us about the team that you have put together to
market your DonJoy brand?
Mr. Cross: We have about 300 sales representatives here
in the U.S. selling the DonJoy brand; these are independent reps that solicit orders on
our behalf. We then take the order, ship the product, collect the money and pay a
commission and we make up about 70% of the income for these independent reps. They are
very tied to us; we feel that they are a part of the company and they feel like they are a
part of the company.
CEOCFO: Have most of your reps been with you awhile or do you
tend to change often?
Mr. Cross: A number of our independent reps have been
with the company as long as I have. We do see some turnover and as a mater of fact, it is
healthy to see some turnover, because we always want to push the bottom performers to
improve their performance. That is always our goal, and so if after some time they
cant catch the leaders, then we do make changes and we probably change somewhere
between 15 & 20% a year as a result of continually trying to get the tail to catch up
with the head. We have a culture of continuous improvement, urgency and accountability and
we expect our sales partners to have the same culture.
CEOCFO: In 2003, your international business was growing
faster than your domestic was; has that changed?
Mr. Cross: Our international business continues to be
one of our fastest growing segments. Last quarter we reported over 16% year-on-year
growth, which is good strong growth and has been a continuing position for us over the
last two years. One thing that we also talked about in 2003, was trying to do some
international acquisitions. The problem with our international business is that it is
rapidly growing, but it is still too small at only 12 to 13% of our total business.
Therefore, our vision is to do some international acquisitions to continue that growth and
also to be a larger portion of our business.
CEOCFO: When you talk of acquisitions, are you referring to
products alone or other complete operating businesses?
Mr. Cross: It will take two directions; one will
geographic expansion and what I mean by that is having our own subsidiaries in those
markets of the world where there is good demand and reimbursement for our products and
that could be acquiring distributor in Spain for example. The second leg of that is
product expansion and we would like to buy some European manufacturers, who manufacture
products that our customers use, but are not available from us today. Therefore, we are
actively looking at both of those.
CEOCFO: You were in Germany, the U.K. and Canada; have
accomplished any further geographic expansion?
Mr. Cross: Since we last spoke, weve opened our
own subsidiary in Scandinavia, which covers all of the Nordic countries and a French
subsidiary. So our geographical expansion has continued with those two additional
CEOCFO: What do your reps tell potential customers to get
them to choose dj Orthopedics products?
Mr. Cross: We talk about product innovation, patented
technology and good clinical or scientific support for how our devices function, and why
the patient is safe in our devices. So we take a three-pronged approach at that.
CEOCFO: I noticed that you just signed a new three-year
contract with Novation, the contracting arm for VHA Inc. and the University HealthSystem
Consortium (UHC), for cold therapy products.
Mr. Cross: We have a division within the company here
that focuses on getting these GPO or national buying groups contracts, so in fact in the
last couple of years weve added a number of these large contracts. Further, that is
why we have seen such good growth in our rehabilitation business, so the Novation contract
is just another one of these large GPO buying group contracts, but it is an ongoing
process. In addition, that wasnt just a one-up; if you look at our press releases
over the last period of time youll notice that we are consistently adding or
renewing these large buying group or GPO contracts. That is a very important part of our
CEOCFO: As your business continues to grow, how do you as CEO
manage such a large diverse global company?
Mr. Cross: The first step is to surround yourself with
great people and we do have a great team here at the company. Ill tell you how you
run the business is that we have a sense of urgency, accountability and continuous
improvement; but talk is cheap. The way we do it is that every functional manager in the
company has to put together a quarterly management by objective, we call it a functional
plan; and present it to the leadership of the company for approval. Hence, people here are
being held accountable; not just for what we achieve in the year, but what we achieve
every quarter as part of this continuous improvement. So we dont wait until the end
of the year to review our functional leaders and weve also tied our bonus program to
these quarterly functional plans. We pay a portion of our bonus every quarter, based on
achievement of what our shareholders expect, which is our operating income and based on
the achievement of these functional leaders quarterly management objectives. So
theres a very good drum beat here within the company and because we a re a small
management team, with these quarterly reviews, it really allows senior management to stay
on top of all of the process and the projects that are under review or development within
CEOCFO: And by this, you are also able to keep a check on
Mr. Cross: There are two numbers that you have to watch
in a business: sales and spending. If you look at the amount of cash that we generate,
that cash shows the quality of the earning and I think the management of the process of
turning revenue into cash.
CEOCFO: Could you tell us about the financial position of the
Mr. Cross: The company is doing well; we reported
revenue growth of around 16% last quarter. We continue to have our cash EPS growing
consistently faster than our gap EPS, we continue to generate free cash flow and reduce
our debt payment. In fact, our leverage now of our debt to EBIDA, is one times, so clearly
we have capacity to do acquisition through the cash that we generate or by conservatively
adding debt to our balance sheet. Therefore, we are in a position to be able to execute on
our strategic vision.
CEOCFO: Is most of your investor relations work done in house
or do you have an outside PR firm that you work with and is attracting investors a focus
Mr. Cross: We do have an in-house investor relations
person, Mr. Mark Francois, who is always available to talk to investors and we actually
see increasing our shareholder base as one of our responsibilities to our current
shareholders. Vickie Capps, our chief financial officer, and myself attend a number of
healthcare conferences and probably in the season, attend one per month. We try every
quarter to go out and do a non-deal road show with one of the banks that cover the company
and certainly, Mark and Vickie in particular are always available to talk to investors. We
hold an annual investors day, which is not that common for a company of our size.
Increasing our shareholder base and communicating with our shareholders is one of the
things that we hold each other accountable for, because it is important to our current
shareholders, to be able to create that kind of liquidity and interest.
CEOCFO: Do you have float available for potential investors?
Mr. Cross: The float right now is probable about 22
million shares or more than 95%.
CEOCFO: In closing, could you address potential investors and
answer the question; why dj Orthopetics?
Mr. Cross: I believe investors should think about our
company and they should hold us accountable to see that we are managing the company in the
way that we said that we would. We have three legs to our strategy; one is to protect and
grow our core rehab business. We are the market leader and obviously everyone out there,
when they wakeup in the morning, is thinking about how to take share away from us. It is
the franchise that we build the company around and we had said that we would like to see
that core rehab business grow to around 7%. Between 6 and 8% is the vision for the growth
of our core rehab business, which is our first strategy. Our second strategy is to
accelerate the growth of our Regeneration business, because that is the highest margin
segment that we have and it is in the highest growth market that we are in. We have
said to our investors that we would look for double-digit growth and we should be able to
deliver that as our strategies gain traction. The third leg of our business in to increase
the size of our international business and as I said; it is the fastest growing segment of
our business and it is not large enough. Therefore, we are very focused on trying to find
some international acquisitions that will be accretive to us, give us new products and
geographical expansion. As investors watch the progress in the company, these are really
the three gages that they should be looking at to evaluate whether we are managing this
business as we said that we intended to do.
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