Michael Jones and Jacob Schools were sales representatives for DePuy Synthes Companies in Eastern Virginia for several years, first as reps working for Quizmo, Inc., a DePuy Synthes sales organization, and then as sales reps employed directly by DePuy Synthes.
At the end of 2012, they resigned from the company and went to work in the same area for a Globus Medical, Inc. distributor named Sky Surgical.
On July 16, 2013, DePuy Synthes sued their former sales reps and their new employer. More on that later.
Reverberations From DePuy/Synthes Merger
Looking at the numbers for the first half of 2013, it appears that the DePuy Synthes merger may have been more difficult for its spine business than originally expected.
Of the 11 major spine companies, 7 reported rising sales in the second quarter ended June 2013. And of those companies, one stood out with a double-digit rate of growth—it was Globus Medical at 11.5% year-over-year (YOY) sales growth. The next closest was NuVasive, Inc. with 6.9% year-over-year sales growth.
The companies that reported declining year-over-year sales growth were: Biomet, Inc. (down 4.0%), Integra LifeSciences Holding Corporation (down 3.0%), Orthofix International, NV (down 2.0%), TranS1, Inc. (down 13.3%) and DePuy/Synthes (down 2.0%).
In fact, DePuy Synthes is expected by Wall Street’s analysts to report a continued drop in sales through 2013. In a recent note to investors, Wells Fargo’s Larry Biegelsen forecasted that DePuy/Synthes sales of spinal instrumentation would be down 3% YOY in the second half of this year.
For the whole of this year, Biegelsen expects DePuy Synthes’ Spine business to post $1.88 billion in sales. Next year, he thinks that the number will rise to $1.904 billion.
The Changing Distribution Model
In his note to investors, Canaccord Genuity analyst Bill Plovanic made a very interesting point about the apparent shift to more direct sales representation. Writing about both NuVasive and Globus Medical quarter, he said: “As the company [NuVasive] grows, we expect it to naturally migrate toward a direct model over time. In that case, margins would expand as sales reps are still compensated the same but NUVA would no longer pay an overhead premium to distributor agents.”
Then, about Globus, Plovanic said:“Not surprisingly Globus expanded its representation in the U.S. at a rate of 10-15% in 2011 and 6% in 2012 after a pause in 2010.”
“More importantly, management noted recruiting was again very strong, with the company continuing to add high quality reps in the Q2/13. We estimate that Globus has added ~50 reps in the 1H/13, bringing the U.S. total to ~400 reps. Given the disruption in sales caused by the integration of the Synthes and DePuy sales organizations, we expect competitive hiring to continue in earnest for the remainder of 2013.”
Globus uses both direct sales people and distributors.
Synthes Direct Sales Model Adopted
Putting Synthes and DePuy together forced a choice between the direct sales model and the distributor model. By and large, DePuy choose direct. Which was the Synthes approach. Synthes built the business using a direct sales force model.
But can DePuy make the change?
“We’re going to be very thoughtful and deliberate about the way we go about combining our spine units, ” Alex Gorsky, then vice chairman of the executive committee at Johnson & Johnson (J&J), said in an interview at the time of the merger. “We think that can be done with minimal disruption.”
Integrating two behemoth companies is tough as DePuy Synthes’ boss Michel Orsinger acknowledged in a June 2013 interview with the Swiss publication, Finanz und Wirtschaft (FuW), that disruption has occurred in the spine sales division. Orsinger was the former CEO of Synthes before taking over the combined orthopedic and spine business of DePuy Synthes as worldwide chairman, Global Orthopaedics Group.
Orsinger acknowledged that DePuy Synthes has lost spinal implants business customers as well as employees in research and development.
During a quarterly conference call with Wall Street analysts on July 16, 2013, Gorsky, now J&J’s chairman and CEO, told analysts that he and his colleagues are really pleased with the way the integration is going.
“Taking on a company the size of Synthes…is no small undertaking. Bringing together (the companies) the way that our teams have, I think, they are really to be commended for it. We have got a multi-phased program in place to bring it together commercially, the entire research and development organization as well as all the supporting functional areas…While we still have work to do in certain areas of the integration, we are making good progress.”
Suing Jones and Schools
Indicative of the challenges of moving from a distributor-based sales model to a direct model is the Jones and School lawsuit which provides a small window into a sales force disruption resulting from the $21.3 billion merger between Synthes, Inc. and Johnson & Johnson’s DePuy Inc. in 2012.
The lawsuit also highlights the challenges when two separate sales models are combined.
On November 10, 2012, Jones resigned from DePuy Synthes. According to the lawsuit, when the company inquired as to his employment plans post resignation, Jones disclosed that he had received an offer from an unnamed Globus distributor and a direct competitor of DePuy Synthes. Jones further stated that he planned to abide by the terms of his Employee Secrecy Agreement.
Schools followed Jones’ resignation with his own on December 20, 2012. When the company inquired as to his employment plans, Schools allegedly told them that he planned to leave the spinal implant business and enter the software development business.
DePuy Synthes Plays Hardball
DePuy Synthes’ complaint against the two former reps tries to paint a negative picture.
According to the suit, “Sky Surgical, Jones and Schools have acted willfully, wantonly and in conscious disregard of DePuy Synthes’ rights. The actions of Sky Surgical, Jones and Schools already have caused irreparable damage to DePuy Synthes’ business. Absent injunctive relief, DePuy Synthes will suffer irreparable harm from the activities of Sky Surgical, Jones and Schools.”
Shortly following the resignation of Jones and then Schools, the lawsuit claims certain key surgeons who previously used DePuy Synthes products switched to Globus.
Sentara Norfolk and Sentara Virginia Beach were DePuy Synthes accounts until recently. Now, says the lawsuit, they’re using Globus products. Both hospitals were significant DePuy Synthes accounts that had been serviced by Jones and Schools.
The lawsuit also claims that on January 31, 2013, Jones was seen selling Globus products on behalf of Sky Surgical at Mary Immaculate Hospital—another former DePuy Synthes account.
On February 19, 2013, Schools was allegedly working on Sky Surgical’s behalf at Sentara CarePlex. On February 20, 2013, Schools allegedly covered a spinal surgery case using Globus products at Mary Immaculate Hospital.
Jones is also accused of soliciting at least one DePuy Synthes employee to join him at Sky Surgical to sell Globus products.
The Non-Compete Agreements
The company claims that Jones and Schools each agreed that, during his employment and for a period of eighteen months following the end of his employment, he would not perform work for a competitor in a position in which he could disadvantage DePuy Synthes or advantage a competitor of DePuy Synthes by the disclosure or use of DePuy Synthes’ confidential information to which he had access.
Jones and Schools also allegedly each agreed that for a period of 18 months following the end of their employment, they would not sell competitive products to any of the DePuy Synthes accounts, customers or clients with whom he had contact in the past 12 months.
Relief Demanded
There are four counts in the lawsuit. The first two allege Breach of Contract against both Jones and Schools. The third is against Sky Surgical for Tortious Interference with Contract. The fourth is Statutory Conspiracy in that Sky Surgical, Jones, and Schools conspired with each other to have Jones and Schools breach their fiduciary duties, use and misappropriate confidential information and otherwise violate their Employee Secrecy Agreement.
Finally, DePuy Synthes asks the Court to enjoin Jones and Schools from soliciting any competitive business, working in any sales or management position and in any location in which he could disadvantage DePuy Synthes or advantage Defendant Sky Surgical.
They are also asking no less than $1 million in compensatory damages against Jones and Schools and at least $1 million in compensatory damages against Sky Surgical. In addition, the company wants punitive damages against Sky Surgical in the amount of $350, 000 and treble damages under the conspiracy charge after a jury trial.
The Big Picture
If, as Wells Fargo’s Biegelsen is forecasting, DePuy Synthes loses approximately $300 million or 20% of its U.S. spine instrumentation because of all the challenges from integrating sales forces, then the sales force disruptions from this merger will have been significant.
Could the overall pricing pressures in spine be pushing companies, as Plovanic wrote in his NuVasive note, to a more direct model? If so, then such lawsuits as this one won’t be the first, nor will it probably be the last.
DePuy’s choice to go direct has been disruptive. But, after all, Superpowers are usually born from great disruption and trauma.
I believe DePuy Synthes is being short sighted. Many surgeons buy because of the excellent service they receive from their local sales representatives. Choice of product often is second to the level of confidence the surgeon has in his local representative. Many devices are perceived equal to the competitive device with service being the key decision factor.
Suing the local Representative can be judged by the Surgeon as an attack on his ability to provide the best care to his patient. This can backfire on DePuy Synthes by losing the support of the local surgeon.
After forty plus years in the healthcare field and being a long-time shareholder in J&J I would advise DePuy treat your people well and when you lose good people don’t spend my investment dollar by suing go out and replace them with better people. Focus on features and benefits not intimidation.
Timothy McTighe, Dr. H.S. (hc)
Executive Director
Joint Implant Surgery & Research Foundation