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Diversity Key to Lifting Medical Device Maker’s Annual Sales

DJO GLOBAL INC.

CEO: Michael P. Mogul.

Revenue: $966 million in 2010; $946 million in 2009.

No. of local employees: 500 (5,000 companywide).

Investors: Blackstone Capital Partners V L.P.

Headquarters: Vista.

Year founded: 1978.

Company description: A global provider of orthopedic devices, with a broad range of products used for rehabilitation, pain management and physical therapy.

Key factors for success: The company expects to see demand for its products rise as life expectancy grows and aging baby boomers seek to remain active longer.

Diversification is the name of the game for Vista-based DJO Global Inc., the largest private company in San Diego.

DJO, which develops, manufactures and distributes a wide range of medical devices — from soft orthopedic braces to knee replacements — has seen annual sales climb, albeit slightly, in an economy that’s convincing many people to postpone expensive medical procedures and treatments.

“We’ve learned through this down cycle that a lot of things we thought were essential are deferrable,” said Jeffrey D. Johnson, a senior research analyst covering medical technology at Robert W. Baird & Co. Inc. in Milwaukee. “People are putting off getting that knee or hip replaced. They’re choosing to live with the pain for a little longer rather than go through the surgery.”

Because of its varied product lines, a dip in one business segment — such as its 1.8 percent drop in revenues from surgical implant products last year — can be evened out by a bump in another, such as the 4.3 percent increase in bracing and supports during that same time frame, said Mark Francois, director of investor relations for DJO.

“We’re one of the only companies, if not the only company, that has a suite of products that span the full spectrum of patient needs,” Francois said. That spectrum begins with injury prevention and ends with surgical rehabilitation; DJO has hundreds of products that fall into those categories and the segments in between. Brand names include Aircast, DonJoy, ProCare, Empi and Chattanooga.

But product variety isn’t the only way that DJO has managed to put its eggs in different baskets. The company, with 2010 sales of $966 million, also has a broad base of customers, from spine surgeons and podiatrists to athletic trainers. And it relies on an array of sales and distribution channels to reach its customers. In fact, no single distributor or customer accounted for more than 10 percent of sales in 2010, according to DJO.

Energy for Acquisitions

While DJO has its own research and development operations, its diversification comes largely through mergers and acquisitions, which have catapulted the company’s growth and size during the past decade.

The most notable deal came in 2007, when DJO accepted a $1.6 billion offer to merge with ReAble Therapeutics Inc., an Austin, Texas, company that’s an affiliate of Blackstone Capital Partners V L.P. DJO continues to be owned primarily by affiliates of Blackstone. Prior to the merger, DJO was publicly held.

DJO has since kept up a fairly consistent acquisition pace. Among the most recent deals: In March, the company signed an agreement to purchase therapeutic footwear maker Dr. Comfort, based in Mequon, Wis., for $254.6 million in cash. The deal gave DJO leading market share in an underserved diabetic footwear market, which the company has estimated at $150 million to $200 million per year, based on 2010 figures.

For a company that’s not far from reaching $1 billion in sales, DJO had very modest beginnings, focused on sports medicine. It was founded in Carlsbad in 1978 by former Philadelphia Eagles and Chicago Bears football player Mark Nordquist, who was nursing a knee injury.

Nordquist, also a recreational surfer, decided to use neoprene, the material from wetsuits, as a way to secure his knee and keep the joint warm. His comfortable knee sleeve caught on, and led to other bracing and orthotics ideas for the company, then known as DonJoy. As the company expanded, it changed its name to DJ Orthopedics before becoming known as DJO in 2006.

Pricing Pressures for Products

DJO and its competitors — including companies such as Stryker in Kalamazoo, Mich., and Biomet Inc. in Warsaw, Ind. — are seeing more and more pricing pressures today for their orthopedic products, particularly on the surgical side, said Johnson, citing looming health care reforms and declining Medicare reimbursements. “It’s harder to justify these premium products with doctors and hospitals,” he said.

But for DJO, that’s not a main concern, Francois said. “Health care cost containment is nothing new for us; it’s just the way of the world,” he said. In fact, as Medicare and hospitals seek to forge alliances with suppliers who can distribute products to a big patient base and multiple locations, DJO has a good selling point, Francois said: “We have the ability to produce in large quantities.”

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