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full range of innovative products, a large R&D facility and the best sales force has
made dj Orthopedics the clear market leader
Medical Equipment & Supplies
(DJO - NYSE)
dj Orthopedics, Inc.
2985 Slott Street
Vista CA 92083
Mr. Leslie H. Cross
Chief Executive Officer
Interview conducted by:
BIO OF PRESIDENT/CHIEF
Leslie H. Cross, 51, 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 orthopedic sports medicine company specializing in the design,
manufacture and marketing of products and services that rehabilitate soft tissue and bone,
help protect against injury and treat osteoarthritis of the knee. Its broad range of
over 600 existing products, many of which are based on proprietary technologies, includes
rigid knee braces, soft goods, specialty and other complementary orthopedic products
including cold therapy and pain management. These products provide solutions for
patients and orthopedic sports medicine professionals throughout the patient's continuum
CEOCFOinterviews: Mr. Cross, please tell us about dj
Mr. Cross: dj Orthopedics is a company that specializes
in Orthopedic Sports Medicine. We are in the area of rehabilitation to injuries of the
extremities or helping patients recovery from the injury or the surgery that takes place.
Our products range from highly sophisticated custom knee braces as seen in the NFL and
NCAA sports etc, to ankle braces and arms slings in emergency rooms in the hospital
setting. There is a complete product range of about 600 products that make up our
rehabilitation, orthopedic sports medicine rehabilitation product range.
CEOCFOinterviews: Do you
also provide products to prevent injuries?
Mr. Cross: Yes, a number of our products are used
prophalactically to help prevent injuries. An example of that would be of the top 25 NCAA
football programs last year, twenty one of those teams used our knee braces to brace their
offensive linemen to prevent injuries. It has become apart of standard equipment now in
College football. Motorcross, skiing and a lot of extreme sports participants use our
products to prevent injury. It is a small segment of our market; the majority of our
market consists of people like you and I who are recovering from some kind of injury or
from surgery related to that injury.
CEOCFOinterviews: Do you
do sell your products on a global basis?
Mr. Cross: We are a worldwide company and about 14% of
our revenues derived from business outside of the United States. We are growing and if you
look at our quarterly report, you will see that our international business is growing much
faster than our domestic business and it is becoming more important. We distribute
directly to Germany, the U.K. and Canada where we have D.J. Orthopedic subsidiaries and
throughout the rest of the world, we utilize a network of independent distributors. One
that we are very excited about is our new distributor in Japan who has started with us
earlier this year and has really done an outstanding job for us.
all of the turmoil that is happening on a global basis, do you feel this is affecting the
company in any way?
Mr. Cross: Not really, our markets tend to be in the
sports medicine and the sports medicine and healthcare markets in those countries are
stable and doing well. In addition, I think the currency has helped us. The Euro has made
us even more competitive in Europe and the same as in the U.K. and Australia as
CEOCFOinterviews: How do
you get the word out?
Mr. Cross: Our customers are the orthopedic sports
medicine surgeons. There are 13,000 orthopedic surgeons in the U.S., and roughly 5,000 of
them state that the focus of their practice is sports medicine, so, it is a well-defined
customer group. In the U.S., we have more than 250 independent representatives that work
on a commission basis to promotes these products to the orthopedic surgeons. Of course, we
also attend many of the orthopedic meetings and conferences. We do regular mailings and
some journal advertisements, but we have really grown the business by developing a
relationship with these orthopedic sports medicine surgeons.
CEOCFOinterviews: How do
you keep track of the inventory of your products?
Mr. Cross: We are a just in time manufacturing
organization. We try to run with 14-21 days of finished inventory. We set our demand for
tomorrows production run based on what we sell today. We have a tightly controlled
inventory. There is no doubt that 600 products are probably a few too many and every year
we go through a product rationalization program where we do exactly what you are
describing. We look at what products are accelerating our growth and what products are not
selling so that we can obsolete those products and so it is an ongoing process.
often do you go back and take a product and say, gee, now we can do this just a
little bit better?
Mr. Cross: Our flagship knee brace which has a patented
Four Points of Leverage design, has just been improved with a new version that has a
patented ForcePoint hinge that has a patented hinge, which really de-accelerates the knee
as it goes into full extension. That I believe is the 13th or 14th
improvement of this product that we have introduced in roughly as many years. We are
constantly looking for ways to make our products more comfortable for the patient, that is
lighter weight, stronger and adding some new and patented features to it like the hinge I
described. It is an ongoing process. We launched in the first quarter five new
products, we launched eight in the second quarter and we have a pipeline of more in the
coming year. Some of those are truly are new products that will take us into the new
segments and some of them are product line extensions to round out our product lines for
customers, so it is a continual process.
any new brace there are copycats, how are you protecting your design?
Mr. Cross: We have a fairly robust portfolio of patent
protection but that is only part of the way that we protect our products. Another way is
by our size of distribution and through our continuous product innovation. Patents alone
arent necessarily what protect the product. We are clearly the market leader in knee
braces with roughly 40% market share and probably 20 competitors worldwide. We have the
largest product range, the largest R&D facility and largest sales force. So, when you
package all of that together that is how you protect your franchise not just through
much do you spend on research and development?
Mr. Cross: We spend a lot less than you would expect.
We spend about a few million in R&D and our products dont require a lot of
investment. A new knee brace, for example, will take us about six months to a year to
develop and launch with the total cost including R&D and tooling a few hundred
thousand dollars. It is a good business, and having that continued stream of new and
updated products is the key to growing in this business.
you using your website for market and ordering purposes?
Mr. Cross: We dont have a shopping basket
facility on our website. Our products are professional products that are prescribed by
physicians for the most part and the patients need the ability to be prescribed the
correct product for whatever their injury or condition is. It needs professional fitting
and instruction so we dont sell retail or directly from our website.
is your financial position?
Mr. Cross: Our revenues were up 6% and on a daily
growth rate we are on a 5/4/4 reporting period so the holidays are always affecting what
kind of billing days we have. On an average daily growth rate our revenues were up
to 8%, and I think we reported our net income went up 14%.
CEOCFOinterviews: Do you
see this revenue growth continuing?
Mr. Cross: We
havent given any guidances, as you know; we have just gotten out of a phase
called performance improvement. This was our first profitable quarter in a
year and until weve gotten another couple of quarters behind us, we arent
looking to provide any specific financial guidance. However, what I would tell you is that
now that the cost cutting and efficiency part of the performance improvement is mostly
behind us and we have demonstrated that in our results. The company is now focused
on accelerating the growth of our business in the United States. As we have said before,
we are not happy with the growth level in the US and we will be focused on accelerating
that throughout the rest of the year.
are your manufacturing facilities?
Mr. Cross: We have two manufacturing locations, our
major facility of over 725 employees is in Tijuana Mexico, that is responsible for the
vast majority of our production volume. We also have a small plant here in San Diego
with about 150 employees. San Diego is a very unique economic environment and people
really appreciate it. Just an hour south of our corporate headquarters here in
Vista, California, we have world-class labor at very economic rates. Because of this
positive economic situation, we have focused our manufacturing initiatives in Mexico, and
we support these manufacturing initiatives with our US engineers out of our R&D and
manufacturing facility here in San Diego.
your new desire to see your sales and more revenue coming out of the US, this will
increase your manufacturing; will you be able to fulfill the demand once this growth takes
Mr. Cross: We have built a very robust manufacturing
operation in Mexico and we are already carrying this 14-day inventory. We can
quickly respond to any blips in demand that we what we see in the actual sales. In Mexico,
as we have scaled up our operations over the past year, we have built in additional
capacity which we can rapidly tap into.
CEOCFOinterviews: I know
that originally this company was started in 1978, when did you come on board?
Mr. Cross: I came on board about 14 years ago. I
came into the company as one of the sales managers and ended up being the senior V.P. of
Marketing and Development and onto the roll of the President of the company about six or
seven years ago.
has been the biggest challenge over the 12 years that you have been there?
Mr. Cross: Many. We were a division of Smith &
Nephew, which is an English Healthcare company. Being a small division of a large company
it is hard to get the attention that you need for working capital and distribution, etc.
Smith & Nephew is still a great company and we are still good friends, theyve
done and incredible job, but we made a decision to approach Smith & Nephew to buy the
business from them. They agreed because they wanted to focus on core businesses and then I
had to go out and raise $200 million dollars to buy the company and that was quite a
seems to be a very big challenge in itself.
Mr. Cross: Yes it was and we were very lucky that we
partnered with JP Morgan Capital Partners, formerly Chase Capital Partners, one of the
largest private equity firms in the world and they have very good knowledge of the
healthcare industry. We could have fallen in partnership with some companies that
wouldnt have been as patient and understanding as JP Morgan has. I think we have
been very lucky in that regard.
you say that your business is almost economy proof?
Mr. Cross: I certainly say it is resilient, because
people are going get injured. However, although, it is still called sports medicine,
injuries to the extremities, those injuries also occur in the workplace and everyday
activities. One of our investors uses one of our products because she sprained her knee
getting out of the hot tub. Hardly a sports medicine injury, but we call it that. As
we get older and continue to golf, play tennis, ski and surf, and generally stay active to
stay fit, we see an aging population experiencing what some orthopedic surgeons have
termed boomeritis, staying fit as we age will ultimately takes its toll on our
all of your products are non-surgical products?
Mr. Cross: Our products are all non-surgical products
that are used either before the surgery, or used to help the physician to manage the
patient after the first 72 hours. This is the critical part after the surgery and then we
have the rehabilitation products to give the patient protection and support on the road to
recovery. The surgical products are devices to reattach and repair the injury and that is
an area we are looking at getting into the future. We were looking at this area during the
last 12 months and backed away from it to focus on our core rehabilitation strategy.
However, in the future we will look for ways to enter the surgical fixation and surgical
part of the sports medicine world as well.
all go hand in hand.
Mr. Cross: They do, because the same surgeon who makes
the decision about using our product is the same surgeon who is doing the work.
is that you feel makes this company unique over your competitors?
Mr. Cross: We offer a full range of products. We were
just awarded the Broadlane contract, which is the one of the largest national accounts in
our industry. One of the reasons why we were successful with that account is because
we can bring the whole product range to them. They dont have to sign contracts with
four or five of our competitors to get the full range. That is one of the reasons why
people buy from us. Also, the continuous flow of innovative products. Our competitors seem
to have smaller product ranges. They are not quite as nimble at developing products across
the whole spectrum. Additionally, the service that we provide, sets the industrys
standards and customer service and quality.
much training do you give your sales staff prior to their going out selling the products?
Mr. Cross: We have two formal programs in training our
sales staff. The rookie program applies to new sales reps who have recently come on
board. They have a lot of anatomy and physiology to learn, as it applies to our
product range. Every year we run what we call the graduate program,
where the sales force comes in-house and that is a more extensive, in-depth understanding
of our products. They learn the science behind new products that are developed. The
program is much more marketing and interactive, where sales people that have been
successful over a period time of a particular sales group or product group actually lead
the discussion and training. We have a website that is set up for our sales force called repnet and clinical papers and articles are posted for
the representatives. Then we have five regional sales managers in the US who help train
the sales reps on products, selling skills, and by riding along with them on sales calls,
helping them build their relationships with the orthopedic surgeons.
you further explain your relationship with your sales reps?
Mr. Cross: Our reps are commission only, they do sell
other orthopedic products, although, they do not sell the products that compete with our
business. In the round, dj Ortho business we accounts for about 70% of their income.
While they are independent and commission only, we are joined at the hip with our
CEOCFOinterviews: From a
potential investors standpoint. They are looking at this company from investment outlooks.
They just read and looked over your company and they are looking at you and saying,
why this company
Mr. Cross: I think orthopedics has been a space that
has given a good return to the investors. That is the general orthopedic space. A
significant number of orthopedic companies are public and the investors that are with
those companies have done very well and so I think that makes our space intriguing. Our
valuation compared to other companies is substantially lower because of the performance
improvement plan we entered into last year. I think that people, who understand that there
is an aging and active population out there, can see the future need for our products and
a future need for our company. I think the investor is going to want to see if we
can deliver on what we said which is continuing to improve our gross profit, reduce our
SG&A expenses and accelerate the growth of the US business.
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