At one point in its long history Wright Medical Group, Inc. was in the breast implant business and its CEO flew around in a gold-plated private jet. Ah the good old days.
Over five days this September, the company announced layoffs, a cost reduction plan, a settlement with the federal government to extend their Deferred Prosecution Agreement (DPA) for a year, and a new CEO.
After this year’s series of very public blow ups, could Wright be getting back on track? After asking various insiders and outsiders this question the consensus is: probably.
Restructuring
On September 15, four days before naming a new CEO, the company announced a restructuring plan that’s designed to reduce costs and, hopefully, increase earnings. The plan eliminates 80 positions and will entail a layoff of about 6% of the company’s workforce. With margins and economies of scale well below those of the larger orthopedic implant manufacturers, some analysts viewed this as a step toward bringing the company’s cost structure more in line with the current orthopedic market fundamentals, and perhaps become a more attractive acquisition target.
Lance Berry, the company’s chief financial officer, agreed with that assessment in an interview with OTW on September 22, although he didn’t acknowledge the acquisition part.
The initial phase of the restructuring will likely be completed by mid-2012 and the remainder of initiatives will be implemented over the balance of 2012 and beyond.
Wright Medical Corporate OfficeWright’s management also expects to streamline its international selling and distribution operations, reduce the number of international products, adjust plant operations, and rationalize R&D projects over the next nine months.
We asked Berry about specifics of the reduction of international products. Said Berry, “At this point we’re staying away from details. I will tell you we have a very large number of products that we sell in the international markets in particular. Some of them are legacy products we’ve sold for a very long time and are very low volume and we’re just taking a hard look at them.”
Enhanced Prospects for Growth and Value Creation
David Stevens, Wright’s board chair who stepped into the interim CEO role when the tide rose last spring, said the industry continues to face a challenging economic environment and, after extensive analysis and consideration, “We believe this plan will enhance the company’s prospects for growth and value creation. We are taking these actions now to better position the company to grow its earnings in 2012 and we are confident that this plan will result in a leaner, more cost efficient operation, which is in the best interest of our business and all of our stakeholders. Additionally, the company continues to have a strong balance sheet and is positioned well for investments in acquisitions to drive future growth.”
Wall Street’s analysts are forecasting that Wright will likely earn $0.76 per share this year up from $0.68 last year, which is an 11% rate of earnings growth. For 2012, analysts are forecasting that Wright will earn $0.87 per share which is a 14% rate of earnings growth.
Deferred Prosecution Agreement Extension
On the same day that Wright announced its plan to reduce its employee count, management also disclosed a resolution to the government investigation of a willful breach of their Deferred Prosecution Agreement signed in 2010.
The company announced the agreement with the U.S. Attorney’s Office for the District of New Jersey and the Office of the Inspector General (OIG), U.S. Department of Health and Human Services to voluntarily agree to extend the term of the DPA for 12 months. The DPA will now expire on September 29, 2012 and calls for no penalties or further actions.
Disruption
Perhaps no company in orthopedics had as much disruption as Wright Medical from the federal investigations into industry surgeon relationships.
Wright entered into a DPA with the U.S. Attorney last year and paid a $7.9 million penalty to resolve allegations of improper relationships with surgeons. The agreement seemed to follow along the same path as previous agreements between the government and Wright’s larger competitors (Zimmer Holdings Inc., Biomet, Inc., DePuy Orthopaedics, Inc. and Smith & Nephew).
The government agreed to defer prosecution of those companies if they paid more than $310 million in fines, hired federal monitors and made reforms. The cases ended in 2009.
The Blow Up
But shortly before a Wright board meeting on May 4, 2011 to talk about compliance issues, the wheels came off. There was an unexpected and shocking announcement that Gary Henley, the CEO since 2006, resigned “without good reason.”
In addition, the board fired Frank S. Bono, the company’s chief technology officer. Bono was fired for “failing to exhibit appropriate regard for the company’s ongoing compliance program.” The company also eventually accepted the resignations of Senior Vice President, General Counsel and Secretary Raymond Kolls; Vice President of Clinical & Regulatory Affairs Alicia Napoli; and Senior Vice President for EMEA Commercial Operations Cary Hagan. All three executives resigned without “good reason, ” according to a company statement.
The company said it had found “credible evidence of serious wrongdoing” regarding its compliance with the DPA. On May 5, prosecutors said Wright had “knowingly and willfully breached” the DPA.
Then came another surprise as Lisa Michels, resigned as vice president and chief compliance officer on August 16. The resignation was effective immediately and the company stated that Ms. Michels is eligible for severance benefits.
None of the former employees have responded to OTW‘s requests for interviews.
“Extensive Cooperation” and Settlement
“Wright Medical and our Board of Directors have taken significant steps to enhance the company’s compliance, ” said interim CEO Stevens. “We believe that voluntarily extending the term of the DPA will provide the company with an opportunity to further demonstrate its commitment to the highest standards of ethical conduct. We will continue to work closely with the Monitor, the USAO, the OIG and other regulators to ensure that the company complies with all laws and regulations that govern our business practices.”
“As a direct result of the federal monitorship, Wright has made significant and wide-ranging changes in corporate culture and tone at the top, ” First Assistant U.S. Attorney J. Gilmore Childers said in a press release. “Our Office is pleased with the extensive cooperation from the newly appointed interim senior management team. Today’s extension will allow Wright to make the transition from interim to permanent senior management while still under the terms of the DPA and the surveillance of the federal monitor.”
Sales Growth
In spite of all the disruptions the company reported a pretty good second quarter. Reported sales rose 4% to $132.5 million during the quarter and net income rose from $4.8 million to $6.1 million. The income number included $2.4 million associated with the DPA situation. Wright continued to launch new products for the foot and ankle market including the Fusionflex Demineralized Moldable Scaffold and the Inbone II Total Ankle Replacement System.
To date, the only negative impact to business the company has attributed to the federal monitoring activities was a decline in sales due to disruption of surgeon training programs.
We asked CFO Berry about those programs and how they will be resumed.
Berry said the company has made a number of changes to their training processes. “We definitely saw a slow down in the amount of medical education that we were able to move through those processes and execute. We do have approval for medical education events in the fourth quarter and hopefully we will be able to get those ramped back up to a more normalized level as we move into 2012.”
Wright’s larger competitors also experienced disruptions to training programs and we asked Berry if Wright’s experience was similar to those companies. Berry said, “Our situation is just more about the time it takes to implement and changes to processes to get things processed through. It was not a situation where our monitors were telling us, you can’t do these things per se.”
Palmisano Hired
With the decks of the government investigation and monitoring cleared and a cost reduction and corporate reorganization program in place, Stevens and the board executed their next strategic move by naming Robert Palmisano to become Wright Medical’s new president and CEO on September 19. Palmisano’s hiring was effective September 17. Stevens will go back to just being chairman.
An analyst from Robert W. Baird & Co., said the naming of Palmisano increases the likelihood that the company eventually will get sold.
Analyst: “Clear Signal for Sale”
Another analyst reportedly said Palmisano is well known as a turnaround specialist and for having successfully sold a number of medtech companies in recent years, including ev3, IntraLase and Summit Technology.
“Palmisano is a serial fixer-upper and seller of medical technology assets, ” said BMO Capital Markets analyst Joanne Wuensch. “There is a lot of work that can be done at Wright Medical.”
We asked CFO Berry about that. He told us that Palmisano has a great track record of managing and executing efficiency programs at companies and if his efforts are successful at Wright, shareholders will benefit. He did not comment on any potential merger and acquisition possibilities.
Back on Track
The river of disruption seems to have settled back into its banks at Wright. Now what does the company need to do to make investors happy?
BMO Capital Market’s Wuensch, who knows Palmisano well and thought it was a great hire for the board, said the company needs to address the increasing scale at the competitor level, (noting the DePuy/Synthes merger) by managing expenses in a bloated cost structure.
Mike Matson at Mizuho Securities said the company needs to expand its upper extremities offerings, such as shoulder replacements, reduce costs and increase their scale through a merger and acquisition, either as a seller (preferred) or buyer.
Many challenges remain for Wright Medical in a tough market. But with a new leader and a new plan, the company can focus on business.
