Wright Medical Group, Inc.

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Wright Medical Group, Inc.

5677 Airline Road
Arlington, Tennessee 38002
U.S.A.
Telephone: (901) 867-9971
Toll Free: (800) 238-7117
Fax: (901) 867-9534
Web site: http://www.wmt.com

Public Company
Incorporated: 1950 as Wright Manufacturing Company
Employees: 797
Sales: $200.87 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: WMGI
NAIC: 339113 Surgical Appliance and Supplies Manufacturing

Wright Medical Group, Inc. designs, manufactures, and markets joint and bone reconstructive devices and technology, specializing in small joint extremities, and hip and knee replacement, as well as bioorthopedic bone regeneration. Small joint orthopedic implants are available for the hand, wrist, elbow, shoulder, foot, and ankle and include the Swanson Hinge Finger, used by surgeons for more than 30 years. Hip and knee reconstructive products apply to total hip or knee replacement, surgical revision replacement implants, and limb preservation. Wright medical devices are designed to replicate the natural motion of the body and to provide stability; the company offers implant parts in a variety of shapes and sizes so that surgeons can fit the reconstructed joint to individual patient anatomy. Wright's bioorthopedic System of Choices is designed to facilitate the body's natural process of bone regeneration through the application of calcium sulfate and other biological materials to bone gaps and fractures in a variety of situations. The company offers surgical instruments for implementation of its devices and bioorthopedic products. Wright promotes worldwide sales and distribution of its products through offices in Europe, Australia, Canada, and Japan, as well as through stocking distribution partners in Europe, Asia, Africa, South America, and Australia.

Founding Innovation and First Successes

While working as a sales representative for an orthopedic products company, Frank O. Wright discovered that people in leg casts suffered from chronic back pain caused by walking on a hard steel heel in the foot of the cast. Wright conceived the idea of a rubber heel to provide a softer impact while walking, easing discomfort, and started Wright Manufacturing in 1950 to manufacture and market the "street heel." Succeeding in this endeavor, Wright expanded the company's product line to include medical soft goods, surgical instruments, and hip and knee implants.

In 1970 the company began to manufacture its most important product, the Swanson Finger. The prosthesis consisted of a one-piece silicone rubber implant with a flexible hinge. The artificial joint embedded easily because the tensile strength of tendons held the implant naturally, with only a hole bored into each end joint. Products for reconstruction of small joints in the hands, feet, and wrists followed, and the company became a world leader in small joint orthopedics.

In 1977, two years after the death of Frank Wright, Dow Corning purchased Wright Manufacturing and changed the name to Dow Corning Wright. Dow Corning's expert knowledge in silicone complemented Wright's capabilities in orthopedics as the company continued to improve and develop joint replacement products. In 1986 the company formed a plastic surgery division to produce and market a breast implant based on new technology. The Micro-Structured Implant retained its softness due to tiny pillars on the surface that prevented contracture or hardening. Questions over the safety of silicone gel breast implants led to liability lawsuits and a ban for most uses by the U.S. Food and Drug Administration, however. Dow Corning Wright halted production in 1992.

In 1990 Dow Corning Wright introduced an innovative artificial knee implant, the Whiteside Modular Knee, named for its inventor, Dr. Leo Whiteside. The product provided a finer replication of a kneecap through a system of replaceable parts that allowed orthopedic surgeons to construct the knee implant to meet the needs of individual patients. The Whiteside Modular Knee sold exceedingly well the first year and contributed significantly to a threefold increase in revenues experienced between 1985 and 1990. In addition, the Infinity hip implant, successfully introduced in 1991, worked in a manner similar to the artificial knee, in that the implant adjusted to different angles to fit the individual requirements of each patient. Dow Corning Wright expanded manufacturing facilities to meet demand for the two products.

1993: New Owners Taking the Company in New Directions

Liability related to silicone breast implants prompted Dow Corning Wright's parent to place the company up for sale. An investment group led by Herbert W. Korthoff acquired Dow Corning Wright in 1993 and gave the company a new name, Wright Medical Technology. (Liability for silicone breast implants stayed with Dow Corning.) Korthoff and Kidd Kamm Equity Partners paid $70.5 million. Korthoff, formerly executive vice-president at U.S. Surgical, Inc. during a remarkable expansion phase, became CEO and chairman of Wright Medical. He chose the company for acquisition because of the market potential of its excellent technology and management. At this time Wright Medical held 85 percent of the world market for small joint orthopedic implants and was one of the leading manufacturers of total hip and knee joint replacement. Korthoff's goals for the company involved doubling revenues to $150 million by 1998, then taking the company public.

One aspect of Korthoff's expansion plan involved strengthening international distribution, to become the only company able to offer a full line of orthopedic products to customers worldwide. The company already operated offices in Brazil, Australia, Hong Kong, and Canada and maintained distribution partnerships in 35 countries. In late 1993 Wright signed a distribution agreement with Kaneka Medix of Tokyo for the distribution of its products in Japan, and in February 1994 the company acquired Orthotechnique in Paris to strengthen distribution in France, Spain, Italy, Greece, and Portugal. The following September Korthoff diverted funds from sales and marketing toward international expansion, as well as engineering for development of spinal fixation devices. With international sales at 25 percent of revenues in 1994, Korthoff hoped to increase that amount to 40 percent by 1997.

While Korthoff envisioned Wright offering a full line of orthopedic products, this involved entering new product markets, specifically, for trauma products, spinal fixation devices, and arthroscopic imaging. The intended acquisition of Advanced Spinal Fixations Systems fell through; through an agreement with BioMed, Inc. in August 1994, however, Wright gained worldwide distribution rights for a minimally invasive spinal discectomy system. Development of the product accelerated after the agreement, putting Wright at the leading edge of that product area.

Another area of interest involved bioorthopedics, biological treatments that facilitate the body's natural healing process. A license agreement with U.S. Gypsum gave Wright worldwide distribution (except to the dental market) of a moldable bone void filler and drug delivery system called calcium sulfate hemihydrated. The product assisted in bone regeneration after part of the bone was removed due to cancer or a bone infection.

Wright expanded in the implant market through a merger with Orthomet, Inc., designer, manufacturer, and marketer of orthopedic products and reconstructive implants. The stock exchange, valued at $59.7 million, occurred through a tender offer completed in December 1994. Through the merger Wright gained rights to a license agreement for finger-joint implant development with the May Foundation for Medical Education and Research. Orthomet reported 1994 sales of $27 million and Wright reported sales of $95.8 million, a 12 percent increase over 1993. Wright recorded a net loss of $49.3 million, due to write-offs related to acquisitions.

1995–97: New Products and Product Markets

During the mid-1990s Wright expanded with a variety of new products and entered several markets for the first time. A license agreement signed in early 1995 facilitated Wright's entry into the trauma and spinal systems markets. In February the company gained the right to exclusive marketing and distribution of Medoff Sliding Plate, a new compression hip screw system used in the treatment of hip fractures. Distribution areas included the United States, Canada, and Central America, with the possibility for access to the global market. Wright added to its line of spinal systems when the company obtained distribution rights for the Single Portal Arthroscopic Lumbar Discectomy System along with an integrated video system. The system provided a minimally invasive, visual method of relieving neural compression and its painful effects, assisting healing and recovery.

Wright introduced its own spinal fixation products as well. In August the WRIGHTLOCK Spinal Fixation System received Food and Drug Administration (FDA) approval for sale of the product. WRIGHTLOCK's dual rod system featured implants and an implantation method that replaced the "nut and screw" fixation method with an easier surgical procedure. The FDA approved the product for use in cases of scoliosis, trauma, tumor, and degenerative disc disease.

Wright improved on its line of joint replacement implants with the introduction of a more durable material in the manufacture of orthopedic implant components, addressing problems of wear in polyethylene implants that began with the oxidative effects of gamma radiation sterilization. The superior quality of DURAMER Ultra High Molecular Weight Polyethylene involved sterilization with ethylene oxide (EtO) gas, which did not affect product quality. Wright improved the supply of raw material and the manufacturing process as well.

Company Perspectives:

We are committed to improving the quality of life of orthopedic patients by providing our customers with the highest quality large joint, extremity, and biologic products. We will provide uncompromising service. We will foster the development of our human resources. We will operate our business ethically and in a manner beyond reproach. We will strive to benefit all who have a vested interest in our business.

New products in the area of joint and bone replacement included the total Segmented Orthopedic System for reconstruction of the femoral (thigh) system. The products applied to severe bone loss and provided more flexibility in customizing prostheses more quickly during surgery and at less cost. For instance, CONCISE Compression Hip Screw System provided a new generation of trauma-related repair of proximal femur fractures.

In November 1995 Richard D. Nikolaev, formerly president of Orthomet, became CEO and president of the company, taking over daily management while Korthoff, as chairman, focused on long-term goals. Investment funds were received from California Public Employees Retirement System, at $60 million, and Princes Gate Investors LP, at $34 million. The company's 1995 sales of $123.2 million included $1.2 million from new products in trauma, arthroscopy, and spinal fixation products. A loss of $6.4 million was within the expected range.

Wright received FDA clearance for the sale of OsteoSet Bone Graft Substitute for use in bone voids and gaps in the extremities in August 1996. Introduced to the market in late 1996, OsteoSet provided an alternative to bone grafts through implantation of medical-grade calcium sulfate pellets onto the bone. The resorbable calcium sulfate facilitates the body's natural process of bone regeneration, and the pellets disappear in four to eight weeks as the bone repairs. This system of repair posed fewer risks than artificial substitutes or bone obtained from another part of the body or a bone bank as no diseases or viruses could be transferred. OsteoSet-T Medicated Bone Graft Substitute contained the antibiotic tobramycin to prevent and heal bone infections. In October Wright acquired the patents, technology, and process of producing OsteoSet from U.S. Gypsum.

Wright continued to develop next generation versions of its reconstructive implant systems. In December 1996 the company-introduced the Total Sorbie-Questor Elbow System joint replacements that replicate natural anatomy and alignment for accurate joint movement, increasing stability and reducing the possibility of dislocation. In May 1997 Wright launched VERSALOK, a low back spinal fixation system providing an adaptable system for intraoperative flexibility and reversibility without set screws or locking nuts. In late 1998 Wright introduced ADVANCE Medial Pivot Knee System, which replicated the natural motion and range of motion of the knee with a unique spherical medial component.

1998: Returning to Original Markets and Expanding on Success in Bio-orthopedics

In early 1998 Wright made executive changes to lead the company in a new direction, focusing on the company's niche markets in small joint and extremity implants and its leading position in bioorthopedics. Korthoff's broad-based strategy of product development did not lead to a substantial increase in sales. In 1997 the company generated $122 million in sales, but spinal and arthroscopy operations accounted for only $2 million and $1.5 million in sales, respectively. The small scale of Wright's operations in those areas could not compete with Sofamor Danek, the market leader, so the revenue represented only a minimal return on investment.

Thomas Patton became CEO in January, after holding the position of executive vice-president of corporate development. Patton discontinued research and development in arthroscopy. The company restructured, eliminating some executive positions and cutting 150 jobs as the company sold the spinal and trauma product businesses.

Wright intensified its focus on bio-orthopedics based on two successful products, OsteoSet and OsteoSet-T. In May 1997 the FDA cleared OsteoSet for use in the spine and pelvis and OsteoSet-T received approval for sale in Canada, Australia, and Europe in 1998, but awaited approval by the FDA. Sales for OsteoSet increased 56 percent in 1998.

In September 1999, Warburg Pincus Equity Partners L.P. and the Vertical Group, Inc. acquired a majority interest in Wright Medical Technology, involving $25 million paid to reduce debt and provide working capital. The company refinanced $60 million in debt as well. The Warburg Pincus investment supported a merger with Cremascoli Ortho Group, of Toulon, France. Cremascoli's facilities included a manufacturing facility in Toulon and a research and development laboratory in Milan, Italy. Together Cremascoli and Wright provided a wide range of reconstructive joint devices, including Cremascoli's important products in hip reconstruction. The merger improved Wright's distribution in Europe, and Wright planned to distribute Cremascoli products in the United States, Japan, and other global markets.

Key Dates:

1950:: Company is founded to market its rubber heel product.
1970:: Wright Manufacturing begins marketing the Swanson Finger implant.
1977:: Dow Corning acquires Wright Manufacturing two years after the founder's death.
1986:: Dow Corning Wright forms a plastic surgery division to manufacture and market new silicone breast implant technology.
1990:: A breakthrough in knee replacement, the Whiteside Modular Knee, is introduced.
1993:: A group of investors acquires the company, which is renamed Wright Medical Technology.
1996:: The Food and Drug Administration approves OsteoSet, a biological bone graft substitute.
1999:: New owners and management focus the reincorporated Wright Medical Group on core markets.
2001:: New products result in significant sales in extremity repair and bioorthopaedic markets.
2002:: Wright introduces REPIPHYSIS artificial limbs that can be lengthened electromagnetically as patients grow.

Wright Medical Group, formed as the parent of the two companies, hired F. Barry Bays as president and CEO. Warburg Pincus transferred Bays from Medtronic Xomed, another medical technology company owned by the investor. With a team of executives brought from Medtronic, Bays revamped distribution, increased funding for research and development, and improved the company's sales force, including initiating direct sales in Japan. The company increased funding for research and development, emphasizing innovations for niche markets, such as the Conserve-Plus metal-on-metal hip prosthesis intended for younger patients, in their 40s. The product was designed to conserve bone by replacing only the surface of the femoral head, the ball in the pelvis's socket.

Niche Market Products Leading to Profitability: Early 2000s

Bioorthopedic bone grafting substitutes contributed significantly to the company's growth. As the product line developed, Wright marketed it as the System of Choices, with different products applied to various needs. In November 1999 the company introduced a product similar to OsteoSet, the AlloMatrix Injectable Putty, a bone graft substitute composed of medical grade calcium sulfate, demineralized bone matrix (DBM) growth factors, and a biocompatible plasticizing agent. The product delivered DBM growth factors for assisting the repair of bone fracture gaps and open defects, as well as an extender in spinal fusions.

After receiving feedback from orthopedic trauma and spine surgeons, Wright developed AlloMatrix C Bone Putty, composed of DBM and cancellous bone chips carried by calcium sulfate. Introduced in early 2001, the product provided more flexible use, such as mixing in the operating room and adding bone marrow aspirate of platelet concentrate taken from the patient's own body to facilitate healing. In October 2001 Osteo-Set BVF (Bone Void Filler Kit) received FDA clearance for expanded claims, specifically, the injectability of the material and hardening properties inside the bone void or fracture site. MIIG 115 Minimally Invasive Injectable Graft provided Osteo-Set in powdered form.

As several successful new products increased sales and profitability, Wright Medical Group pursued public ownership through an initial stock offering in July 2001. At $12.50 per share, the company sold 7.5 million shares, raising $84.8 million for debt repayment.

Other important new products involved advancements in treating extremities. The LOCON-T system, for the repair of radial fractures, used low-profile screws to prevent complications by minimizing irritation or rupture of tendons caused by screws. EVOLVE Modular Radial Head devices provided flexibility in fitting patient body size with a variety of head and stem sizes in two pieces rather than a single piece. These products, as well as new ankle and foot products, contributed to a 21 percent increase in sales of extremity products in 2001. Along with the OLYMPIA Total Shoulder System, extremity product sales increased another 21 percent in 2002.

The AlloMatrix line and OsteoSet BVF Kits were integral to a 28 percent increase in sales of bio-orthopedic products in 2001, while AlloMatrix, MIIG, and OsteoSet Resorbable Bead Kits supported a 43 percent sales increase in 2002. OsteoSet products generated high profit margins as well.

Wright became profitable in 2002 after several years of losses. Sales of just over $200 million generated $25.1 million in net profit, after losses of $1.5 million in 2001 and $39.5 million in 2000. In 2002 revenues from state-of-the-art knee and hip reconstructive devices offset a decline in sales of older products, though sales of knee systems increased slightly.

In December 2002 Wright received FDA clearance for REPIPHYSIS Technology. Already used in Europe for six years, the technology facilitated the lengthening of limb implants through periodic treatments of electromagnetic fields. REPIPHYSIS was designed for children and teenagers who would otherwise outgrow a bone replacement implant, usually received in the treatment of bone cancers. As the child grew, no further surgery would be required to replace an implant, something that could happen on a yearly basis. Through a "compassionate use" clause in FDA regulations, the technology had already been applied successfully to 13 patients over three years at St. Jude's Children's Research Hospital in Memphis.

As technology for hip and knee reconstruction had reached the point of natural motion replication, development shifted to long-term wear and reduction of revision procedures. Toward that end Wright developed an alumina ceramic-on-ceramic bearing for total hip replacement for use in the TRANSCEND Acetabular System. In February 2003 Wright received FDA clearance to market the bearing, one of only two companies approved to produce a ceramic-on-ceramic device.

In the field of bio-orthopedics, Wright acquired ADCON Gel technology, a patented, resorbable material that provides a barrier to fibroblasts responsible for causing scarring after surgery; the scars cause postoperative pain and hinder range of motion, often resulting in revision surgery. Wright also began to market CELLPLEX TCP Synthetic Cancellous Bone, a scaffold for the application of bone marrow aspirate to bone regeneration. CELLPLEX resorbed into the body as new bone was generated.