If you didn't know this was an implant … Concept and design
USA and Canada
Europe, Middle East and Africa
Synthes, Marketing Services & Communications
Synthes, Inc.
Synthes GmbH
1302 Wrights Lane East
Glutz-Blotzheim-Str. 3
Synthes, Investor Relations
West Chester, PA 19380
4500 Solothurn
Solothurn, Switzerland
USA
Switzerland
Tel. +1 610 719 5000
Tel. +41 32 720 40 60
Litho
US Customer Service (toll free):
Fax +41 32 720 40 61
Fotolitho Sturm,
Tel. +1 800 523 0322
[email protected]
Asia Pacific
Latin America
Photographer
Synthes Asia Pacific
Synthes LAT, Inc.
Marco Aste
Suite 1A
703 N.W. 62nd Ave.
Basel, Switzerland
Building 3, Level 3
Suite 550
20 Bridge Street
Miami, FL 33126
Printed by
Pymble, NSW 2073
USA
Binkert Druck AG
Australia
Tel. +1 305 341 1022
Laufenburg, Switzerland
Tel. +61 2 9449 0400
Fax +1 305 341 1028
Fax +61 2 9449 0499
[email protected]
Ö035.000.170öä This annual report is published in English only.
www.synthes.com
Synthes, Inc. Annual Report 2010
Projekt1 14.02.11 10:25 Seite 1
035.000.170 Annual Report 2010 © Synthes, Inc.
Muttenz, Switzerland
New Perspectives. Annual Report 2010.
Synthes.LCP Annual ReportHand 2010 Compact
… you’d think it was jewelry.
Business Report
BR15
Spinal Cages
To us, no opportunity to contribute to the quality of life is too small. Our products are true gems – donned for health.
MatrixMIDFACE
Although it may sound a bit old fashioned: we like to crown our customers king and queen – to be treated with royal dignity.
X-Plate and Navicular Plate
To innovate high-quality products, we listen carefully to surgeons and OR personnel alike. Our business fundamentals produce elegant simplicity.
StenoFix
Real innovation often sets off an entire chain: An idea – Development – Improvement – Striving for true excellence.
MatrixORBITAL
Day in and day out, we search for true clinical benefits and added medical value for surgeons and patients alike. Sometimes the end result is curvaceous beauty.
LCP Compact Hand
X-Plate and Navicular Plate
The LCP Compact Hand system consists of different sized
Foot surgery is complex and often requires metal implants.
stainless steel or titanium plates and screws that are used for
X-plates and navicular plates are two examples of plates used
the fixation of fractures in the fingers and the mid-hand. The
for the surgical fixation of fractures, but also for connecting
stable fixation achieved with these implants allows early
bones that have been detached by the surgeon in order to
mobilization, which is necessary for the fracture and soft tissue
improve the functionality or appearance of the foot.
structures to heal.
Spinal Cages
StenoFix
Cages are used as a placeholder for discs that have been
StenoFix is an interspinous spacer to be used after surgical de-
surgically removed because they protrude and impinge upon
compression of the spine. The device is indicated for moderate
nerve roots (disc herniation). This causes significant pain and
to severe spinal lumbar stenosis and is used as a spaceholder
therefore justifies a surgical removal. The type of cage chosen
between the spinous processes to help treat pain that arises
depends on the surgical entry point and the approach the
when standing upright or extending. StenoFix controls the
surgeon chooses for a specific intervention.
segmental extension and distracts the interspinous space. It can be implanted at one or two lumbar levels from L1 to S1.
MatrixMIDFACE
MatrixORBITAL
The MatrixMIDFACE system is part of a whole new plating
These thin preformed plates are used for the surgical fixation
platform for internal fixation of the craniomaxillofacial skel-
of fractures of the orbital base (the bony area underneath
eton. It is used for trauma and reconstructive surgery of the
the eyeball). The titanium plates are preformed in a three-
midface. The titanium plates are available in four thickness-
dimensional shape to avoid any bending or cutting by the
es and color-coded according to their strength. A single screw
surgeon during surgery.
diameter works for the entire system and all plates so the system is easy to use, but still flexible.
Significant Facts
2,154.2 850.2 424.4 258.2 3,687.0
FCF and Capital Expenditure (US$ millions) Free Cashflow CapEx
Rest of World 7.0%
2006 343.6 190.3
Asia Pacific 11.5%
Europe 23.1%
US$ millions
Sales per region 2010 (US$ millions) North America Europe Asia Pacific Rest of World
North America 58.4%
2007 602.0 223.1
2008 497.2 261.1
2009 737.6 299.6
2010 759.2 345.5
800 700 600 500 400 200
Free Cashflow
100
CapEx
300
0 2006
2006 704.6 29.5% 266.4 11.1% 125.6 5.3% US$ millions
Operating Expenses (US$ millions) Selling and Promotion % of Net Sales General and Administrative % of Net Sales Research and Development % of Net Sales
2007 802.3 29.1% 294.6 10.7% 148.6 5.4%
2008 934.3 29.3% 349.4 10.9% 169.9 5.3%
2009 978.9 28.8% 382.4 11.3% 168.3 5.0%
2010 1,080.1 29.3% 393.3 10.7% 172.4 4.7%
Assets 2010 (US$ millions) Current Assets Property, Plant & Equipment Intangible Assets Goodwill Other Assets
3,414.9 893.8 2,119.3 1,293.1 202.5
2007
2008
2009
2010
Other Assets 2.6% Goodwill 16.3% Current Assets 43.1% Intangible Assets 26.7%
1,100 1,000
Property, Plant & Equipment 11.3%
900 800 700 600 Selling and Promotion
500 400 300
General and Administrative
200 100
Liabilities and Equity 2010 (US$ millions) Current Liabilities 554.6 Long-term Liabilities 630.3 Retained Earnings 3,925.2 Other Equity 2,813.5
Current Liabilities 7.0% Long-term Liabilities 8.0% Other Equity 35.5%
Research and Development
0 2006
2007
2008
2009
2010
Retained Earnings 49.5%
Profitability (US$ millions) Net Sales Gross Profit Margin Operating Income Margin Net Earnings Margin
2006 2,391.6 81.9% 31.9% 21.3%
2007 2,759.7 81.0% 32.8% 22.2%
2008 3,192.5 82.7% 33.8% 23.0%
2009 3,394.7 82.6% 34.3% 24.3%
2010 3,687.0 82.6% 34.8% 24.6%
Employees Total Employees (at year-end) Change in Employees (%) Sales Force (at year-end) Sales Force as % of Total Employees
2006 8,451 11% 2,134 25%
2007 9,070 7% 2,446 27%
2008 9,947 10% 2,940 30%
2009 10,705 8% 3,319 31%
16,000 US$ millions
… you'd think it was jewelry.
4,000 3,500 3,000 Net Sales
2,500 2,000
Gross Profit
1,500 1,000
Operating Income
500 Net Earnings
0 2006
2007
2008
2009
2010
2010 11,426 7% 3,636 32% 16%
14,000
14%
12,000
12%
10,000
10%
8,000
8%
6,000
6%
4,000
4%
2,000
2%
0
0% 2006
2007
2008
2009
2010
Total Employees Sales Force Change in Employees (%)
Significant Facts
2,154.2 850.2 424.4 258.2 3,687.0
FCF and Capital Expenditure (US$ millions) Free Cashflow CapEx
Rest of World 7.0%
2006 343.6 190.3
Asia Pacific 11.5%
Europe 23.1%
US$ millions
Sales per region 2010 (US$ millions) North America Europe Asia Pacific Rest of World
North America 58.4%
2007 602.0 223.1
2008 497.2 261.1
2009 737.6 299.6
2010 759.2 345.5
800 700 600 500 400 200
Free Cashflow
100
CapEx
300
0 2006
2006 704.6 29.5% 266.4 11.1% 125.6 5.3% US$ millions
Operating Expenses (US$ millions) Selling and Promotion % of Net Sales General and Administrative % of Net Sales Research and Development % of Net Sales
2007 802.3 29.1% 294.6 10.7% 148.6 5.4%
2008 934.3 29.3% 349.4 10.9% 169.9 5.3%
2009 978.9 28.8% 382.4 11.3% 168.3 5.0%
2010 1,080.1 29.3% 393.3 10.7% 172.4 4.7%
Assets 2010 (US$ millions) Current Assets Property, Plant & Equipment Intangible Assets Goodwill Other Assets
3,414.9 893.8 2,119.3 1,293.1 202.5
2007
2008
2009
2010
Other Assets 2.6% Goodwill 16.3% Current Assets 43.1% Intangible Assets 26.7%
1,100 1,000
Property, Plant & Equipment 11.3%
900 800 700 600 Selling and Promotion
500 400 300
General and Administrative
200 100
Liabilities and Equity 2010 (US$ millions) Current Liabilities 554.6 Long-term Liabilities 630.3 Retained Earnings 3,925.2 Other Equity 2,813.5
Current Liabilities 7.0% Long-term Liabilities 8.0% Other Equity 35.5%
Research and Development
0 2006
2007
2008
2009
2010
Retained Earnings 49.5%
Profitability (US$ millions) Net Sales Gross Profit Margin Operating Income Margin Net Earnings Margin
2006 2,391.6 81.9% 31.9% 21.3%
2007 2,759.7 81.0% 32.8% 22.2%
2008 3,192.5 82.7% 33.8% 23.0%
2009 3,394.7 82.6% 34.3% 24.3%
2010 3,687.0 82.6% 34.8% 24.6%
Employees Total Employees (at year-end) Change in Employees (%) Sales Force (at year-end) Sales Force as % of Total Employees
2006 8,451 11% 2,134 25%
2007 9,070 7% 2,446 27%
2008 9,947 10% 2,940 30%
2009 10,705 8% 3,319 31%
16,000 US$ millions
… you'd think it was jewelry.
4,000 3,500 3,000 Net Sales
2,500 2,000
Gross Profit
1,500 1,000
Operating Income
500 Net Earnings
0 2006
2007
2008
2009
2010
2010 11,426 7% 3,636 32% 16%
14,000
14%
12,000
12%
10,000
10%
8,000
8%
6,000
6%
4,000
4%
2,000
2%
0
0% 2006
2007
2008
2009
2010
Total Employees Sales Force Change in Employees (%)
Synthes. Annual Report 2010
Letter to Shareholders BR2 Company Profile BR4 Financial Highlights BR4 Global Presence BR5 Business Report
Regional Highlights BR7 Corporate Citizenship
Educational Initiatives BR12 Employees BR13 Cultivating Synthes’ Culture of Integrity BR14 Product Highlights
Overview Product Groups BR16 Trauma. Variable Angle LCP Forefoot/Midfoot System BR17 Spine. MATRIX BR18 Cranio-Maxillofacial. MatrixORTHOGNATHIC Plating System BR19 Corporate Governance
Group Structure and Shareholders CG2 Capital Structure CG3 Board of Directors CG4 Group Management Committee CG9 Compensation, Shareholdings and Loans CG10 Shareholders’ Participation CG12 Changes of Control and Defense Measures CG14 Auditors CG15 Information Policy CG16 Financial Review
Report of Independent Auditors FR2 Report of Independent Accountants FR3 Consolidated Balance Sheets FR4 Consolidated Statements of Operations FR6 Consolidated Statements of Changes in Stockholders’ Equity FR7 Consolidated Statements of Cash Flows FR8 Notes to the Consolidated Financial Statements FR10 Note to Directors and Shareholders FR47 Investor Key Data FR48
Business Report
BR1
Business Report
Letter to Shareholders
Dear Co-Shareholders and Friends of Synthes In 2010, Synthes’ sales grew by 7.5% and net earnings by 8.5% (both
Synthes’ sales growth of 7.5% (in constant currency) in markets that
in constant currency). We launched over fifty new products, created
are growing more slowly than in the past is testament to the strength
close to 500 new jobs and strengthened our organization in order to
of the Synthes brand name, as well as the agility with which we work
master the challenges that lie ahead. As every year, this report pro-
in sales and in product development.
vides an overview of the results of the remarkable work undertaken by the more than 11,000 employees of Synthes as well as that of our
The strength of the Swiss franc and our relatively high share of Swiss-
distributors and partners around the world during a dynamic 2010.
based manufacturing operations did not materially impact our financials. Because of cost containment and lower legal expenses, the op-
Strong financial performance despite a challenging year in global
erating income margin increased by 50 basis points to 34.8%. The tax
orthopaedics
rate was reduced to 27.7%. All of this resulted in an increase in earn-
2010 was a year full of challenges and change for both our industry
ings per share to US$ 7.65 (an increase of 8.5% in constant currency).
and our company. In that context, Synthes’ performance and the progress made in most key financial metrics as well as in all major opera-
Synthes is known for being conservative and for acting with a long-
tional activities and all parts of the world are evidence of the strength
term perspective. This was proven again in 2010 by prudently adding
and resilience of our company.
to our employee base, which grew by 6.7% (including the acquisition of Anspach in November). In addition, we ended the year with a strong
Fortunately, we have the privilege of being deeply integrated into ma-
cash balance and the Board of Directors decided to increase the divi-
jor trauma centers and university hospitals around the globe, with
dend from CHF 1.35 to CHF 1.80 and the payout ratio from 18% to
many surgeons using our products on a daily basis. This gave us a
25%.
wonderful opportunity once again to make a meaningful contribution to improving surgical patient care.
Highlights from 2010
In May, we formally inaugurated our new manufacturing facility in We have gained market share in the global Trauma, Cranio-Maxillo-
Suzhou, China, in the presence of local and national representatives
facial (CMF) and Power Tools markets, but we also had to cope with
from the Chinese government. Production by this small factory will
changing market conditions in our Spine division with pressure on
primarily be for the Chinese market and the surrounding area. The
prices and volume. However, we have finally been able to launch
facility also comprises a training and product development center. Ap-
MATRIX Spine, a much-needed new fixation system for the lumbar
proval to sell products in China is expected in 2012 following com-
spine, used in the surgical treatment of back pain and deformity.
pletion of ongoing clinical studies.
BR2
Business Report
Synthes. Annual Report 2010
In the fourth quarter of 2010, we acquired Anspach, a privately-held
In 2011, we will consolidate our leadership position in the markets we
company specializing in the development, manufacturing, sale and
serve by improving customer experience of our products for the long-
servicing of high-precision power tools. This was a highly complemen-
term. We will build on the strengths of Trauma, CMF and Power Tools
tary addition to our existing portfolio and organization in power tools
globally, while continuing to address Spine’s performance with new
and will therefore allow us to rapidly gain market share. We expect
product launches. Overall, we expect the market environment to
double-digit growth in this market that has a value of approximately
remain fairly challenging and we will continue to counteract with
US$ 1.2 billion.
further advances in our productivity gain initiatives to maintain our strong profitability.
The Board of Directors of Synthes is actively involved in the strategic direction of our company. Dr. Roland Brönnimann retired at the AGM in April 2010 after ten years at Synthes, seven of which serving on
Cordially,
the Board. We would once again like to thank him for his valuable service. Daniel Eicher was elected to the Board at the 2010 AGM. He brings us wide-ranging experience on various boards of large Swiss organizations. Surgeon education and outlook
Much of the success of our company would not be possible without
Hansjörg Wyss
Michel Orsinger
the relationship we have with the AO Foundation, our partner in ed-
Chairman of the Board
President and CEO
ucation for surgeon and operating room personnel. The AO made significant advances in the way that it provided education in 2010, and we expect to continue to benefit from this fruitful collaboration which is now in its 53rd year. Nowadays, if a surgeon wants to attend a course, he or she would probably opt to prepare using eLearning or online resources, including videos. The AO (and also Synthes) is therefore adopting a blended learning approach, to address the learner’s needs with state-of-the-art technology.
Business Report
BR3
Business Report
Company Profile. Synthes, headquartered in West Chester, PA (USA), is a leading global medical device company, employing over 11,400 people whose mission is to improve patient care around the world.
Bone work from head to toe
speed devices with the acquisition of Anspach in 2010. All in all, we
Through its five product groups (Trauma, Spine, Cranio-Maxillofacial,
offer a comprehensive product portfolio coupled with excellent ser-
Biomaterials and Power Tools), Synthes develops, produces and mar-
vice through our technical sales force and state-of-the-art education-
kets instruments, implants and biomaterials for the surgical fixation,
al programs to secure us a leading position for the future.
correction and regeneration of the human skeleton and its soft tissues. We operate in product markets with high growth, driven by the
Striving for innovation
aging population and improvements in technology that enable treat-
Synthes establishes the foundations for its excellent market position
ment of more patients with better implants.
by continuously developing better solutions. Our goal is to provide the safest and most advanced implants, instruments and technologies that
Present on every continent
ensure reliable operating procedures, rapid recovery and a pain-free
Our staff works every day toward meeting the needs of surgeons,
life after surgery. We guarantee high quality, constant innovation and
operating room personnel and patients. We stand for high quality,
total concentration on the needs of our customers.
constant innovation and consistent customer orientation. Over 40 subsidiaries and around 50 distributors are managed by four area head
Guided by our Values & Principles
offices: West Chester (USA) for North America; Solothurn (Switzer-
Synthes’ position as a leading global medical device company is based
land) for Europe, Middle East & Africa; Sydney (Australia) for Asia/
on our mission of improving patient care and our long-standing three-
Pacific and Miami (USA) for Latin America. We run 13 manufacturing
pillar strategy, comprising innovation, sales force expansion and edu-
facilities, mainly located in the United States and Switzerland.
cation. Our seven Values & Principles – Patient Driven, Surgeon Focus, Innovation, Quality, Education, Partnership and Integrity – continuous-
Reaching for the sky
ly guide our strategies and actions.
Synthes has set the standard for treating fractures. We are the world leader in traumatology; we rank among the top companies for spinal
Financial facts at a glance
devices and we are in the leading position in the cranio-maxillofacial
In 2010, Synthes generated revenues of US$ 3.7 billion and net earn-
business. Synthes is an innovative pioneer in the field of biomaterials
ings of US$ 908 million. Over the last 10 years (2001–2010), Synthes
such as resorbable implants, bone graft substitutes and coated mate-
has increased its revenues from US$ 0.9 billion to US$ 3.7 billion,
rials. Synthes also offers a wide range of power tools for surgical use,
representing a CAGR of 15%, including the acquisition of Mathys
a business unit that was recently enhanced by a selection of high-
in 2004.
Financial Comparison 2010 vs. 2009 2010
2009
3,687.0 million
3,394.7 million
8.6% / 7.5%
6.3 % / 8.9%
82.6%
82.6%
Operating income margin
34.8%
34.3%
Net earnings margin
24.6%
24.3%
Net sales in US$ Sales increase in US$ / local currency Gross profit margin
Earnings per share in US$ Free cash flow in US$ Approved dividend in CHF Employees at year-end SIX Swiss Exchange Symbol: SYST.VX ISIN: US87162M4096 Market capitalization at year-end 2010: CHF 14,995,969,691
BR4
Business Report
7.65
6.94
759.2 million
737.6 million
1.80
1.35
11,426
10,705
Synthes. Annual Report 2010
Global Presence
SD
VT
Elmira, Horseheads
DE
NY
WY
NE
CT PA
New York
Brandywine, West Chester West Chester
UT Denver
Monument KS
WV
NM
Balsthal Bettlach/ Grenchen
NJ
Bern
Raron
DE OK
Hägendorf Solothurn
MD
CO AZ
Tuttlingen
Umkirch
FR
MA
LI
AT
Salzburg
CH
Mezzovico IT
VA
TX
Locations U.S.A.
Locations Europe
NC
AL
GA
Suzhou
SC
Shanghai
CN
FL
Palm Beach Gardens
Hong Kong
Miami
TW
VN LA
Locations China
Legend
Affiliates
Distributors
Global Corporate Headquarters
European Headquarters
Manufacturing Sites Business Report
BR5
Business Report
Business Report
Regional Highlights BR7
BR6
Business Report
Synthes. Annual Report 2010
Business Report. Regional Highlights. Synthes has four reporting regions. North America accounted for almost 60% of global sales, while Europe and the emerging markets of Asia Pacific and Latin America are slowly catching up thanks to our daily contribution to better patient care. Sales per region 2010 (US$ millions) North America Europe Asia Pacific Rest of World
2,154.2 850.2 424.4 258.2
Rest of World 7.0% Asia Pacific 11.5%
Europe 23.1%
North America 58.4%
North America
to build a dedicated team of sales force members in 2011 to exclusive-
North America attained local currency sales growth of 4.3% for the
ly take care of these surgeons mainly in outpatient surgery centers.
full year 2010, a result of mixed performances in the various divisons. A challenging year for Spine
On the one hand, in Trauma and CMF, Synthes grew at a high single-
In Spine, Synthes was not immune to the mounting pressures from
digit and low double-digit percent rate, respectively, and was able to
the U.S. market. Payors and regulators are paying more attention to
use its outstanding market position to its benefit in terms of compre-
the volume of spine surgeries being performed and reimbursement
hensive product offering and the best-educated and technically pro-
has become harder. Insurance companies are tightening the criteria
ficient sales force. This led to market share gains in these two divisions.
that have to be met for certain types of spinal conditions before agree-
On the other hand, the company had to cope with negative growth
ing to reimburse for a procedure, particularly spinal fusion with im-
in Spine, due to market-specific reasons but also to internal reasons
plants. Furthermore, in view of the recent financial crisis and associ-
related to product-lifecycle management.
ated job losses, patients are less willing to take time off work for elective surgery or are unable to come up with shared payment or de-
Strong Trauma position enhanced in 2010
ductible amounts. They tolerate the pain and delay or cancel surgery.
In Trauma, we continued to successfully fight pricing pressures seen in an increasing demand for discounts and an increased rate of dis-
In addition, prices have come under downward pressure. Hospitals are
counts offered by the competition. We have a premium offering that
starting to dictate prices (at reduced levels) and competitive forces are
justifies a premium price. This is evident from our over 50% market
leading to a single-digit percent decline in the overall price level. Nev-
share, which has helped us significantly in our positioning and in our
ertheless, we are seeing some signs of recovery. Our long-awaited
collaboration with our hospital customers. We have a broad product
launch of MATRIX, a comprehensive pedicle screw fixation system for
portfolio with unique features and the biggest and best-educated sales
the lumbar spine (for deformity and for the treatment of lower back
force, coupled with a leading educational offering that plays an im-
pain due to spinal degeneration), began in November in the U.S. and
portant role in the decision-making process.
will start in the first quarter of 2011 in Europe and other regions of the world. We feel strongly about MATRIX and will be able to gain
We again launched over thirty new Trauma products, mostly expan-
back market share that we may have lost over the past few quarters
sions of our successful LCP product lines that are now available with
in this important segment in Spine.
variable screw angulations to make the placement of these plate-andscrew constructs even more intuitive and much simpler.
Together with MATRIX we have also launched T-Pal, a new cage (i.e. placeholder for the disc space after removal of the diseased disc)
In addition, we have launched a large set of implants and instruments
which allows minimally invasive treatments, a clear trend in the fu-
for orthopaedic foot interventions, called the Forefoot/Midfoot sys-
ture. In 2011, we will enter the vertebroplasty market with a new ce-
tem, a product line that is important to us and provides an even great-
ment and delivery system called Vertecem. Vertebroplasties are re-
er offering to surgeons who operate on feet on an outpatient basis
constructions of the vertebral bodies after fractures due to
and therefore have historically not been served as much by our sales
osteoporosis, a growing problem within conditions, sometimes re-
force as hospital-based surgeons. To address this need, we will start
ferred to as the “aging spine”.
Business Report
BR7
Business Report
Extraordinary growth in CMF
decades. The settlement with the U.S. government related to the Nori-
In CMF, growth in 2010 was primarily achieved through the contin-
an case reinforces our compliance work and we are already vigorous-
ued expansion of the Matrix Plating Systems, the targeted launch of
ly enforcing these rules and regulations, which every member of our
the MatrixRIB System (for the fixation of rib fractures) and a fixation
team has to abide by. It will make us an even better organization and
device to be used in primary sternal closures, i.e. for patients who have
be valuable beyond the requirements that are part of the settlement.
a high risk of complications. The acquisition of the power tools company Anspach is an excellent Our recent creation of the Thorax segment has proven to be success-
addition to our product offering as it brings a complementary prod-
ful as evidenced by the fact that this is now our fourth-largest prod-
uct line to the Synthes power tools portfolio. Anspach has a state-of-
uct group within CMF (behind Neuro, Midface and Mandible). The
the-art service facility and training center and provides us with high-
Thorax portfolio includes sternal closure devices (used to fix the ster-
speed power tools used in neurosurgery, ear, nose and throat (ENT)
num after open heart surgeries) and a plating system to fix fractures
and spinal surgery.
of the ribs. In addition, our partnership with Kensey Nash has yielded success. Un-
Europe, Middle East and Africa
der the partnership, which was initiated in 2009, Kensey Nash are pro-
The EMEA region’s sales growth of almost 13% (in local currency, ex-
cessing Synthes’ porcine dermis product, XCM. This acellular dermis
cluding acquisitions) is an excellent achievement in the current envi-
is used for soft tissue repair, e.g. as a suture-patch for hernia repair,
ronment.
and we are well positioned to gain market share in this relatively young A strong 10.5% growth in Europe, coupled with over 50% growth in
market.
the Middle East and Africa, contributed to this result. Synthes has once In 2011, we will continue to launch new products within CMF, with a
again expanded its leadership position and gained market share.
focus on the neuro and midface market. Winter weather contributes to growth Key initiatives undertaken in 2010
Europe’s strong performance was influenced by severe winter weather,
For the U.S. market, the establishment of our Metro Centers has prov-
both at the beginning and especially at the end of the year. The early
en to be successful as it reduces required investment into field equip-
winter in November and December led to icy roads, sidewalks with black
ment. Metro Centers are logistics offices that store and manage
ice, and increased winter sport activity: a collection of activities that of-
Synthes’ surgical instrument and implant sets and dispatch and allo-
ten leads to increased accidents and falls that involve a higher fracture
cate them as efficiently as possible. The number of sites was expand-
volume and therefore provided us with record sales months. These re-
ed within Trauma but also established within the Spine sales organi-
cord months, however, are not expected to be repeated in 2011.
zation: there are now almost 40 centers scattered around the U.S. and we will add another 15 by the end of 2011. Metro Centers em-
Our European Trauma, CMF and Power Tools business has shown
power our field team to deliver better service and response times.
strong growth in 2010. Synthes has significantly increased its share in these markets. Our Spine business on the other hand – as in the U.S.
Synthes is always on top of new technologies. The first Synthes iPhone
– has faced challenges in terms of lower procedure volumes, contin-
and iPad application was launched in 2010 and features a whole ar-
ued pricing pressure and the entry of new competitors for market
ray of tools suited to best fit the need of surgeons and supports our
share in this challenging market. Additionally, the lack of competitive
sales force in doing their everyday jobs. The Synthes app features prod-
products in certain segments of our portfolio has undermined our per-
uct technique guides, surgical approach videos, presentations, and
formance.
much more. Content update is easily managed within the application. In the Middle East, we benefitted from a large tender order (bulk orSales force additions over the last few years have provided us with a
der from the government of Saudi Arabia), which is made bi-annually
unique position with a dense network of technical sales specialists.
on behalf of government-owned hospitals.
We will focus on refining territory coverage in 2011 (and beyond) to provide excellent support for the use of our products and to maintain
The economic environment in Europe will continue to soften due to
the high level of service that we have achieved over the last several
budget cuts and cost constraints in the healthcare sector across most
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Synthes. Annual Report 2010
countries. Capital purchase of equipment has been significantly re-
Manufacturing site in China formally inaugurated
duced and Synthes has started an initiative to better manage the ef-
A highlight of the year was the formal opening of our new manufac-
fectiveness of the loan service in order to support the increased de-
turing site in Suzhou, close to Shanghai, in May. This facility, which is
mand of loan requests.
subject to the same rigorous quality standards as our U.S. and European factories, will be coupled with a small product development cen-
Outlook for 2011
ter and a distribution center that will provide local markets with prod-
In the middle of 2011, our European headquarters building in Solo-
ucts appropriate for the Asian population.
thurn will be finished and accommodate several hundred employees in the very heart of Switzerland. It is ideally located, close to Zurich
The factory employs approximately 50 people and manufactures just
and its international airport, the city of Berne, and our Swiss manu-
under 100 line items for India, Taiwan and Malaysia. In order to break
facturing sites. In 2011 overall, we expect a continuation of our mar-
into China, we need to undertake clinical trials. These are currently in
ket share expansion in EMEA. Growth will be lower than in 2010,
progress and all approvals are expected in 2012.
mainly due to the absence of the Saudi Arabia tender order and due to an expected milder winter.
Being a local manufacturer in China enables us to provide Synthes quality implants to a large number of patients who were previously unable to have access to this technology. In addition, we are able to
Asia Pacific
tailor down-sampling product assortments and thereby remain an at-
Asia Pacific attained sales growth of 10.3% (in local currencies) in
tractive supplier who understands the specific economic challenges
2010, a result of mixed performances in the various areas within that
and limitations, and addresses the unique medical needs of patients,
region. This growth is above the company’s average and a reflection
in this region.
of the potential of emerging markets that Synthes brings to life. Sales force continues to grow
Our Asia Pacific business is made up of four distinctive regions. The
The Asia Pacific sales force grew by 17% in 2010, a result of the com-
main share of the business comes from Japan (approximately 40% of
mitment to expansion of our service and technical expertise that we
sales) and Australia/New Zealand (approximately 20% of sales). These
want to bring to operating theatres across the region. A specific em-
two regions are comparable to Western Europe or the U.S. in terms
phasis was placed on product-specific staff training and education, to
of the penetration and use of our products. Despite bi-annual price
strengthen product and technical expertise as well as improve busi-
cuts in Japan, the price level in both Japan and Australia is high, al-
ness efficiency and streamline productivity levels.
lowing for profitable business operations. In 2011, the sales force will continue to be expanded as our presence The third region consists of the larger emerging markets of China, In-
in emerging market grows and the breadth of our product line expands.
dia and Korea. There is a huge demand for our products in these countries. The challenge for us is to keep up with the development of in-
Education in conjunction with the AO Foundation
frastructure (hospital and equipment) as well as trainings of potential
Together with the AO Foundation (our partner in education and prod-
new surgeon customers in order to secure the supply to the emerg-
uct development), over 130 basic, intermediate and advanced level
ing hospitals that will provide care to the growing population in these
educational courses were conducted across Asia Pacific in 2010. The
countries.
AO continues to set the standard for surgeon education in trauma, spine and CMF and our continued collaboration with this world-lead-
The last segment within Asia Pacific consists of a small number of dis-
ing organization ensures that we provide surgeons in the region with
tributor-operated countries in East and Southeast Asia (mainly Taiwan
the best education available.
and Thailand), which will eventually also become more meaningful. Synthes training and exhibitions
In 2010, the business continued to expand profitably, securing future
A highlight in the training calendar was the first four-day advanced
growth in all areas. There is an exceptional growth potential in both
Hand & Wrist cadaveric course, co-presented by the Asia Pacific train-
our Spine and CMF divisions (current market share of 11% and 15%,
ing team and seven highly respected surgical faculty members. This
respectively), primarily because of our relatively recent entry into these
will become a regular event in the training calendar. Exhibition high-
businesses in most emerging markets.
lights of the year included high-level sponsorships at a number of
Business Report
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Business Report
conferences including the Asian Congress on Oral & Maxillofacial Sur-
and faster market introductions of the latest technologies that this
gery in Kuala Lumpur, Malaysia, and the triennial International Federa-
structure typically entails.
tion of Societies for Surgery of the Hand (IFSSH in Seoul, South Korea. In view of the success of logistics points that were set up previously in Outlook for 2011 and beyond
Brazil and Colombia, this concept was also introduced in Peru and Mex-
In the mid-term future, our goal is to broaden our Asian specific implant
ico. These points allow implant and instrument sets to reach the end
portfolio, to provide a dedicated “wet lab” training site for both sur-
users in only a few hours, rather than as long as a full day transit time.
geons and employees for the region. In addition, we will continue to push for penetration into young markets, the next step being Vietnam.
The AO Foundation remains an important partner in education and continues to be recognized as a valuable training organization to surgeons and operating room personnel in this region. In 2010, 122 AO
Latin America
courses and events in the region were conducted and over 60 are al-
Over the last few years, Latin America has become more developed
ready scheduled for 2011. Additional courses will be added as required
and in most countries in the region it is now standard to use internal
throughout the year.
fixation products for the treatment of orthopaedic trauma, spine and CMF.
Allocation of personnel in product development 2010 Asia Pacific 1%
From this viewpoint, Synthes’ sales growth of 14.6% (on a constant currency basis) is especially remarkable. Brazil and Mexico – large markets in Latin America – performed especially well. However, as in other regions of the world, the Spine business had a weaker performance
Europe 42% North America 57%
in 2010. This can be attributed to a combination of a slowdown in the activity from private hospitals, price pressures in the public hospital segment and the use of more conservative treatment schemes. In addition, the business in countries where distributors are engaged, rather than our own sales force, performed significantly weaker than in other years. Fortunately, our distributorship business represents less than 9% of total Latin American sales.
Allocation of sales personnel 2010 (3,636 people in total) Latin America 13%
Various countries with varying performances
We were especially encouraged by the positive turn we saw in the middle of 2010 and the upswing that followed in the third and fourth
North America 45%
Asia Pacific 21%
quarter. In Brazil and Mexico, which together represent 50% of our Latin American business, we further progressed with penetration of the markets
Europe 21%
and posted sales growth of over 20%, on a constant currency basis. In Colombia however, where we generate almost a third of our sales
Sales force growth 2010
for the region, we had to face various challenges in 2010: on the one hand, the national elections did not allow for growth in public bud-
North America
3%
gets, and on the other, reforms in the national health system caused further uncertainty. Nevertheless, we are confident that 2011 will provide us with better performance in this important market. For 2011, we are planning to initiate a direct market presence in Chile (where we engaged a distributor until 2010) and we expect to see above average sales growth caused by the increased service efforts
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12%
Europe Asia Pacific
17%
Latin America 0%
22% 5%
10%
15%
20%
25%
Synthes. Annual Report 2010
Corporate Citizenship
Educational Initiatives BR12 Employees BR13 Cultivating Synthes’ Culture of Integrity BR14
Business Report
BR11
Corporate Citizenship
Corporate Citizenship. Educational Initiatives. Synthes is a valuable partner for surgeons and operating room personnel, providing them with an assortment of education activities throughout their careers. In close partnership with the AO Foundation, Synthes continues to further develop state-of-the art educational programs. During 2010, new educational methods became available, and Synthes
An advanced learning environment that simulates the actual surgical
continues to develop technologies and methods for providing educa-
environment is offered by Synthes in our global headquarters in West
tional support to our customers. Synthes supports the AO Foundation,
Chester, PA (USA) and in a few locations in Europe, as well as Asia Pa-
as they address the changing educational environment with new Con-
cific, where surgeons are able to operate on cadavers in a modern op-
tinuing Medical Education (CME) teaching methods and technologies.
erating room setting. In addition to the West Chester facilities, we have
CME refers to a high-value form of educational events and online pro-
conducted technology education in our Mobile Cadaver Lab as well.
grams which are developed, reviewed and delivered by expert teachers in their respective clinical specialty.
During the last year, we supported trauma surgeons with new course modules on the new variable angle LCP Distal Radius Plate. For spine
Commitment to supporting high quality CME activities
surgeons, we successfully ran access courses with anatomical speci-
The AO Foundation remains the premier provider of CME throughout
mens, focusing on minimally invasive posterior fixation, aging spine
the world. Conducting over 400 courses with over 31,000 participants
(In-Space, perforated pedicle screws, Oracle Cage, and VBS) and we
in 2010, its principle-based education is focused on solid evidence and
also started a series of new trainings on the new Stentoplasty Technol-
its clinical practice continues to set the standard for content and de-
ogy – a third generation product by Synthes, which helps to treat ver-
livery. The AO Foundation, through its specialties, closely monitors its
tebral compression fractures in a minimally invasive way and which
teaching faculty, its course content, and the effectiveness of its teach-
guarantees a stable reposition of the compressed vertebra.
ing methods. It is committed to providing state-of-the-art education to clinicians throughout their careers – from the early days of training
In Europe, we successfully started a new series of courses, where a
to establishment as experienced clinical practitioners.
group of approximately thirty participants and five faculty members are invited to debate and lecture for two full days around a specific
Synthes provides financial and in-kind support to the AO Foundation
topic. After an intense debate on indications and options, the Synthes
for its CME activities. The AO Foundation is constantly investigating
solution is shown and taught; however, the pros and cons of any new
new concepts in learning methods as well as the changing landscape
technology is also thoroughly debated. It is our strong belief that new
of information technology and the increasing demands placed upon
implants and new technologies need to be placed, but not pushed on
practicing surgeons. Dedicated teams of AO education experts work
the market. Open discussion and sharing best practice is key to improv-
together to develop education innovations.
ing patient care.
Product-specific education
Providing “life-long” educational support
As with all AO surgeon education initiatives, cadaveric specimens are
Beginning with the early days of their career as clinicians-in-training,
used whenever possible to assure the most accurate simulation of the
doctors and OR personnel have distinct and unique needs at various
clinical environment when training product specific technologies. In
points throughout their career. Whether it is the highly acclaimed Syn-
contrast to AO’s CME activities that Synthes supports, these technol-
thes Resident Program, the popular workshops for post-graduate fel-
ogy programs are specifically targeted towards new products that may
lows, or specific technical training for surgeons already in practice, Syn-
not yet have been vetted for inclusion in CME activities. Examples of
thes has educational programs available for the clinician to use either
product-specific educational events that were conducted recently in-
as a scheduled activity or at “time of need”. We will continuously work
clude: the new ASLS nailing system, sternal closure devices, minimal-
to ensure that we provide the best education possible using the latest
ly invasive spine instrumentation, neurotrauma, foot and ankle instru-
and best technology.
ments and implants, and upper extremity implants. Breakdown of educational events 2010 Addressing the education needs of today’s clinicians
Synthes is working with modern technology to offer clinicians several options for learning about Synthes products and related techniques. Using the internet and/or mobile devices, clinicians have access to a full repository of Synthes information at any time. We call it “time of
Operating room personnel courses* 8% Lectures 10%
Clinical management* 37%
Preceptorships 11%
need” education. In Spine, for example, the focus has shifted from large, national programs – historically 90% of Synthes Spine educational opportunities – to local, private courses. This model is more effective and now accounts for roughly 70% of all courses. BR12
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* AO Foundation courses
Technical/instructional courses 34%
Synthes. Annual Report 2010
Corporate Citizenship. Employees. In a year largely defined by a challenging economic climate and the rapidly changing needs and expectations of our customers, Synthes has continued its commitment to the growth and development of its workforce.
At the heart of the Synthes’ success is the simple goal of improving
of our global managers participated in our global leadership develop-
patient care. We have consistently achieved this goal through a ded-
ment program “Leadership Connections” in 2010. Each session in-
ication to innovation, education and service, delivered by our global
cludes active engagement with our Chief Executive Officer and other
workforce of highly talented and dedicated individuals. At Synthes,
members of our executive team. Through this program, we are build-
we strive to provide a work environment that is both challenging and
ing a global network of Synthes leaders that are aligned with our strat-
rewarding, a work environment that sustains our reputation as an em-
egy and direction. We will continue our commitment to this program
ployer of choice in the orthopaedic market.
throughout 2011 and beyond.
Passion and commitment by our employees around the globe
In 2010, we also introduced a new Global Learning Management Sys-
In 2010, Synthes once again grew its global headcount and created
tem. Through this system, we are able to deliver a vast array of prod-
close to 500 job opportunities. Our continued commitment to inno-
uct and technique training, and simulation. It provides 24-hour access
vation has resulted in our decision to establish a Product Development
to our library of soft skills and systems training curriculum and will be-
Center in China, placing Synthes engineers close to our customers in
come the heart of our quality training system. In addition to training,
the Asia Pacific region. Engineers from our Innovation Group will be
we engage employees through a variety of cross-functional global
the first members of the Asia Product Development team as they lead
projects and assignments. Our global service program supports the
the transfer of the Synthes product development process to the re-
transfer of Synthes knowledge and technology around the world. This
gion. The development center will be co-located with our Suzhou man-
year, employees from across the organization have engaged in assign-
ufacturing facility inaugurated in 2010.
ments that have given them the opportunity to live and work internationally for a period between six months and five years in close to
In all the markets around the world, our Sales Consultants are dedi-
twenty different Synthes locations around the globe.
cated to providing the highest possible standards of service and education to their customers. Our Sales organization grew by 10% glob-
Looking ahead, we remain committed to providing careers rather than
ally, and by 18% in the important emerging markets of Asia Pacific
just jobs for those who share our mission and commitment to our key
and Latin America. As a part of our growth, Synthes customers in Ire-
principles of innovation, education and service.
land and Chile are now serviced directly by dedicated and highly trained Synthes Sales Consultants. Recognizing and rewarding performance
We understand that the continued success of Synthes is built upon
Breakdown of Synthes’ 11,426 employees globally 2010 Latin America 7% Asia Pacific 11%
the passion and commitment of our highly talented employees. In re-
North America 42%
turn, we strive to maintain an organizational culture that recognizes and rewards individual and team performance and encourages individual growth.
Europe 40%
We are committed to open and collaborative dialogue between managers and employees. In 2010, we introduced “Peak Performance”, our new performance management system. Through this program, we assess individual and team performance against predefined goals
Synthes’ global growth in employees 2010
and the alignment of individual behaviors to our core Values and Principles. In 2010, the “Peak Performance” program was introduced to
8%
North America
employees in the US and Asia Pacific. In 2011, the program will be expanded to the rest of the organization. Promoting growth
Our management team promotes continued education and development of our employees through a combination of education, training, development assignments and cross-functional team experiences. 293
Europe
3%
Asia Pacific
12%
Latin America 0%
15% 5%
10%
15%
Business Report
BR13
Corporate Citizenship
Corporate Citizenship. Cultivating Synthes’ culture of integrity. Our commitment to the highest levels of professional and ethical standards in our industry is driven by our seven key values and principles. 2010 was marked by the settlement with the U.S. Government related to the Norian case. As part of the settlement, Synthes has entered into a corporate integrity agreement, which reinforces and enhances our corporate compliance program. Our corporate ethics and compliance program focuses on our compa-
Focus on highest legal and ethical standards
ny’s commitment to integrity and sets forth the guiding principles for
Synthes’ success has always been based upon acting ethically and re-
how we conduct business. By focusing on our values and principles,
spectfully at all times. Simply put, our success is founded upon our in-
we succeed in delivering on our mission of improving patient care.
tegrity. Synthes remains focused on operating in accordance with the highest legal and ethical standards, as well as on our mission to im-
Synthes’ Corporate Ethics and Compliance Department facilitates the
prove patient care.
corporate ethics and compliance program and supports our employees, business partners, vendors, and contractors in their responsibilities to comply with the law and to uphold the highest levels of pro-
Origin of our commitment to compliance
fessional and ethical standards. Compliance, Ethics & Professionalism New initiatives in the global compliance organization
During 2010, Synthes initiated a number of activities that further
Operational level
strengthened and enhanced our global ethics and compliance organization and program. Synthes consolidated the regulatory compliance groups under the Chief Compliance Officer. This unified, global group will monitor and address commercial and regulatory compliance matters across the entire company. In addition, Synthes instituted a new commercial compliance auditing and monitoring group, dedicated to Synthes’ commercial activities, as well as new compliance specialist positions embedded in each of our global divisions. These specialists help facilitate compliance activities at the divisional level. Settlement of the Norian case with the U.S. Government
During 2010, Synthes reached a settlement with the U.S. Department of Justice and the Office of Inspector General of the Department of Health and Human Services (OIG) relating to the Government’s inquiry into certain test marketing and promotional practices from May 2002 to July 2004 involving products of Synthes’ Norian subsidiary. Under the settlement, Synthes agreed to pay US$ 808,000 in fines and forfeiture payments, and agreed to divest the assets of its Norian subsidiary. Norian, a fully-owned subsidiary of Synthes, Inc., agreed to pay fines and forfeitures of approximately US$ 23.5 million. Following the Norian divestiture, Synthes and the buyer will ensure continued delivery of Norian’s current products for the benefit of physicians and patients. Also as part of the settlement, Synthes entered into a Corporate Integrity Agreement with the OIG. Under that agreement, Synthes will build upon its existing corporate ethics and compliance program, which was established in 2005, and retain an independent review organization to help the company monitor and evaluate compliance in its promotional and product-related business functions.
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Integrity
Strategic level: Values & Principles
Synthes. Annual Report 2010
Product Highlights
Overview Product Groups BR16 Trauma. Variable Angle LCP Forefoot/Midfoot System BR17 Spine. MATRIX BR18 Cranio-Maxillofacial. MatrixORTHOGNATHIC Plating System BR19
Business Report
BR15
Product Highlights
Product Highlights. Overview Product Groups. Synthes offers a comprehensive range of implants and instruments for the fixation of fractures (trauma), a full range of solutions for spinal degeneration and other conditions, as well as a portfolio of implants for facial, cranial, mandibular and thoracic reconstruction. Our goal is to provide the safest and most advanced implants, instru-
CMF
ments and technologies that ensure reliable surgical procedures, pos-
CMF implants are used for the operative treatment of fractures of the
itive clinical outcomes and rapid recovery for patients in Synthes‘ three
mandible, midface and skull, for the reconstruction of bones follow-
main areas of activity: Trauma, Spine and Cranio-Maxillofacial (CMF)
ing tumor resections, and for the correction of deformities. The com-
surgery. Through dedicated sales forces for each of these three prod-
prehensive portfolio ranges from minute screws and plates (for re-
uct categories, we sell implants and instruments that are used in op-
pairing facial fractures) to systems for jaw reconstruction and skull
erating rooms throughout the world.
closure in neurosurgical procedures.
In addition to the above product groups, Synthes also maintains a
A significant new product launched in 2010 is the MatrixORTHOGNA-
power tools business (i.e. pressured air and battery-powered drilling
THIC Plating System; a reconstruction system used to correct dental
and sawing systems) and a biomaterials division that develops bone
misalignments (see page BR19).
graft substitutes, resorbable implants and coatings. These two business units complement our three main surgical specialty fields and help enhance the spectrum of treatment choice. Trauma
Implants and instruments for the surgical treatment of fractured bones account for the largest share of our business. We hold a clear market leadership position in the global trauma market. Trauma implants consist of plates, screws, nails, and systems for external fixation that are used to fix and stabilize broken bones. Today, there is a specifically-designed implant for nearly every single bone in the human skeleton. The comprehensive portfolios for the arm, leg, hand, foot and pelvic bones allow the surgeon to choose the optimal fixation device depending on the bone and its quality, the type of fracture and the patient’s general condition. In 2010, Synthes launched the Variable Angle LCP Forefoot/Midfoot System. It offers us new opportunities in an area where Synthes has not been very active in the past: elective foot surgery, a field with hundreds of different techniques used by podiatrists and foot surgeons alike (see page BR17). We are very thrilled about this product line. Spine
Spine is Synthes‘ second-largest area of activity. In this product category, we offer spinal surgeons and neurosurgeons a broad range of implants for the treatment of back pain caused by degenerative spinal conditions or fractures and tumors. The implants consist of plates, screws, rods and hooks to stabilize the spine, and cage implants to stabilize the intervertebral spaces. These products help alleviate back pain, fix fractures and correct deformities. In 2010, Synthes launched the long-awaited MATRIX system; a comprehensive pedicle screw fixation system that offers variability, choice and ease of use (see page BR18).
BR16
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Synthes. Annual Report 2010
Product Highlights. Trauma. Variable Angle LCP Forefoot/Midfoot System. A new set of anatomic- and procedure-specific implants and instruments developed specifically to address the needs of reconstructive foot surgery. The system includes an innovative compression feature for fracture gap closure and variable angle locking technology. Foot deformities such as bunions, club feet and hammer toes are ex-
heal more quickly. It consists of compression wires that can be used
amples of common foot problems and are typically caused by genet-
for preliminary fixation of the plate to the bone. While competitive
ic predisposition, disease or a traumatic injury (bone fracture). In many
systems are limited to relatively low amounts of compression and plate
cases, reconstruction of the foot is required to restore normal anato-
configurations, the Synthes compression feature allows almost any
my and help improve the patient’s quality of life. As a result of the
amount of needed compression independent of the plate design.
prevalence of people suffering from these deformities, dedicated foot and ankle specialists have emerged.
With Synthes’ variable angle locking option, the screws can be locked into the plate at any angle, allowing the surgeon to more easily avoid
Anatomic- and procedure-specific implants
crossing a joint or independent lag screw. This solution creates more
Today, there are hundreds of surgical procedures and techniques re-
flexibility in handling foot cases, where anatomy varies significantly
lated to foot reconstruction. In responding to this trend, Synthes has
from patient to patient.
developed a comprehensive system for both the forefoot and midfoot. The system consists of 48 procedure-specific and general plates de-
Market and competition
signed to address a majority of foot procedures. A variety of plate
In the last several years, competitors have developed products address-
shapes such as X, T, L and cloverleaf gives the surgeon more flexibili-
ing the specific needs of foot and ankle surgeons. These competitors
ty in finding treatment options for the foot’s complex anatomy. For
have slowly gained in market share. Synthes’ Variable Angle LCP Fore-
greater versatility, a mesh plate is also available that can be cut and
foot/Midfoot System, however, takes a comprehensive approach in
contoured to meet the specific needs of the patient.
providing treatment options for a wide range of clinical pathologies associated with the foot and ankle. The variety of choice present in
New technologies
the system in combination with its innovative technology will open up
Two new technologies were introduced with this system: the compres-
new growth opportunities and ultimately allow us to substantially grow
sion method, and the variable angle locking option.
our share in this market segment.
The innovative compression method allows the surgeon to reduce and
The Forefoot/Midfoot System has been on the market since August
compress the gap between bone fragments, in order for fractures to
2010, and the surgeon feedback to date has been phenomenal.
Innovative compression feature
Variable angle locking technology
Business Report
BR17
Product Highlights
Product Highlights. Spine. MATRIX. A new universal set of instruments and implants for the surgical fixation of the lumbar spine as part of the treatment of spinal degeneration and deformity, offering many advantages over existing products on the market.
Synthes’ new MATRIX Spine system helps primarily in the treatment
The transconnectors used to cross-stabilize the rods on both sides of
of degenerative diseases of the lumbar spine, which can be associat-
the spine are spring-loaded for easy attachment.
ed with the world’s aging population. The aging process can cause the spinal discs between each vertebrae to lose their flexibility, elas-
MATRIX also has a deformity option, which is used to intra-operatively
ticity and shock-absorbing characteristics. Over time, degenerated
correct a deformity of the spine that can occur in conjunction with a
discs may protrude (disc herniation) and impinge nerve roots, which
degeneration or as a stand-alone disease. The correction is achieved
causes inflammation and creates pain or restricted movement.
by inserting screws and hooks to the spine and then correcting the misaligned spine by forcing the implants on to a well-aligned rod with
Pain relief for degenerative disease treatment can be achieved through
specialized instruments.
non-invasive treatments, such as physiotherapy or a pain-medication regime. If the pain is severe and persistent, surgical interventions are
Advantages of minimally invasive surgery
indicated. They can involve the removal of the impinging part of the
In recent years, much advancement has been made in minimally inva-
disc (nerve root decompression), or require additional stabilization of
sive approaches to spine surgery, which is why these techniques have
the respective spinal segment. These fusions are achieved by putting
gained interest. Minimally invasive surgery (MIS) utilizes small skin in-
in placeholders for the disc (cages) and – in the example of MATRIX –
cisions and therefore reduces soft tissue damage, decreases blood loss
screws and rods to provide a rigid fixation to these spinal segments.
and hospitalization time, and leads to a faster return to normal activities for the patient.
This surgical instrumentation of the spine is a standard technique to achieve fusions and is used worldwide.
The MATRIX MIS System features efficient, stackable instrumentation for a streamlined surgical process. The MIS system also enables easy construct assembly from screw insertion through to the end of the surgery.
System features
The MATRIX implants are intended for screw fixation into the pedicles of the spine. The system features a unique, rigid screw-instrument in-
Market perspective
terface to make the insertion of the implants as ergonomically comfort-
The market for posterior lumbar pedicle screw fixation has an estimat-
able as possible. It also provides intra-operative adaptability and excep-
ed value of US$ two billion, which makes it the biggest market seg-
tionally well-controlled instrumentation. MATRIX Spine is the total
ment in the global spine business.¹ Synthes Spine now has a full prod-
solution for the stabilization of spinal segments. A variety of implant
uct offering, including access and discectomy instrumentation,
materials (depending on the strength required) and screws that feature
inter-vertebral body fusion implants, biomaterials, and open and MIS
a patented dual-core design to enhance bone purchase are an integral
fixation products, and is well positioned to gain in market share.
part of the selection.
Reference 1
Millennium Research Group, Inc., US Markets for Spinal Implants 2010, July 2010.
Insertion of a locking cap for complete fixation of a pedicle screw
BR18
Business Report
Variable transconnectors with easy to attach snap-on mechanism
Sleeves for minimally invasive surgery
Synthes. Annual Report 2010
Product Highlights. Cranio-Maxillofacial. MatrixORTHOGNATHIC Plating System. Specialized implants and instruments for corrective jaw surgery with innovative system features and an improved product design to fully address the needs of its users.
People suffering from dental misalignment (malocclusion) often expe-
MatrixORTHOGNATHIC is a simple yet comprehensive product line
rience a range of functional problems (such as chewing discomfort)
that offers precise implants and instruments for orthognathic surgery.
as well as more emotional problems like effects on self-image. The
Innovative system features, such as reversible plates and standard
course of treatment begins when patients are referred to an oral sur-
screw diameter, reduce the number of implants necessary for surgery.
geon by either a dentist or orthodontist to determine if orthognathic
Combined with improved product design (like visual aids for plate
surgery is necessary.
bending and implant colour-coding by strength), this comprehensive system directly addresses the needs of the surgeon, the OR staff, and
Generally, the oral surgeon comes up with the treatment plan for the
ultimately the patient.
patient and works with an orthodontist to move the teeth into the proper position using braces (orthodontics). If orthodontic treatment alone
Positive market feedback
is not sufficient to align the teeth, orthognathic surgery is indicated.
MatrixORTHOGNATHIC continues the Synthes tradition of serving surgeons’ needs and ultimately improving patient care. During initial
Orthognathic surgery is described as the use of surgical bone cuts (os-
surgeries, users commented that the MatrixORTHOGNATHIC implants
teotomies) of the upper jaw (maxilla), lower jaw (mandible), and chin
and instruments are a well-designed improvement over previous sys-
to improve the patient’s alignment of the teeth (occlusion), therefore
tems and that the system is extremely well organized and very easy
restoring normal function and improving aesthetics.
to use during procedure. These critical aspects have been the foundation for the success of all the Matrix systems in Synthes CMF.
A single surgical bone cut, or any combination of surgical bone cuts, can be used to advance, setback, or adjust the jawbones to address
Impact on Synthes’ position
the clinical need. Reasons for performing orthognathic surgery include
The overwhelming acceptance of MatrixORTHOGNATHIC is evident
inherited (congenital) anomalies, dento-facial anomalies, traumatic in-
in recent global sales trends. After introduction, the new system has
jury, and/or secondary reconstruction.
allowed the Orthognathic market segment to grow by high doubledigit percentages. The Orthognathic segment within CMF now makes
A state-of-the-art solution
up a substantial share and represents an area where we are continu-
MatrixORTHOGNATHIC was launched in October 2009 in Europe and
ing to invest in order to enhance the offering to surgeons and their
in January 2010 in North America. This system is the fourth dedicat-
patients.
ed plating system developed under the new Synthes CMF Matrix product platform. The previous systems include the MatrixNEURO, MatrixMIDFACE, and MatrixMANDIBLE.
Precise implants for orthognathic surgery: Reversible plates eliminate the need for right and left plate designs
Business Report
BR19
Synthes. Annual Report 2010
Corporate Governance
Group Structure and Shareholders CG2 Capital Structure CG3 Board of Directors CG4 Group Management Committee CG9 Compensation, Shareholdings and Loans CG10 Shareholders’ Participation CG12 Changes of Control and Defense Measures CG14 Auditors CG15 Information Policy CG16
Corporate Governance
CG1
Corporate Governance
1. Group Structure and Shareholders
1.1 Group structure
Synthes, Inc. and subsidiaries (the Group) are comprised of Synthes, Inc., a corporation registered in Delaware, USA (Synthes, Inc. or the Company) and the unlisted companies as shown in the Financial Review, Note C20 The Financial Review contains detailed segment reporting in Note C13. The Group develops, manufactures, and distributes instruments, implants and biomaterials for the surgical fixation, correction and regeneration of the human skeleton and its soft tissues, including both metallic and osteobiological materials in different areas of the world. Additionally, the Group has a power tools business including development, manufacturing and distribution. Synthes, Inc. shares of Common Stock are listed on the SIX Swiss Exchange and included in the Swiss Market Index (SMI), and are traded on SWX Europe, the SIX Swiss Exchange’s blue chip trading platform in London. The Swiss securities number for Synthes, Inc. stock is number 1863105. The ISIN is US87162M4096. Market capitalization as of December 31, 2010 was CHF 14,995,969,691 corresponding to approximately US$ 15,987,803,126. 1.2 Significant shareholders
The following table sets forth the identities of the significant shareholders of Synthes, Inc. and their holdings of shares at year-end. Shareholder
Dr. h.c. mult. Hansjörg Wyss, MD
Shares
%
47,070,638
40
Wyss family trusts
9,650,817
8
MFS International
6,687,113
6
Amy Wyss, a Director of Synthes, Inc., is a beneficiary of the Wyss family trusts. Synthes, Inc. is not aware of any shareholders’ agreements. 1.3 Cross-shareholdings
None.
CG2
Corporate Governance
Synthes. Annual Report 2010
2. Capital Structure
2.1 Capital on the disclosure deadline
nize any transferee who is a U.S. Person as a shareholder of the Com-
See Financial Review, Note C12.
pany for any purpose whatsoever and shall not record any transferee who is a U.S. Person as a shareholder of record. Excepted from these
2.2 Authorized and conditional capital in particular
transfer restrictions are (i) persons who are Qualified Institutional Buy-
– Conditional capital: None
ers as defined in Rule 144A of the Securities Act of 1933 who pur-
– Authorized capital: see Financial Review, Note C12.
chased shares of the Company in its secondary offering in 1999, and (ii) transferees of such persons who comply with applicable resale re-
2.3 Changes in capital
strictions.
No changes in the Company’s capital structure were effected in the last three financial years with the exception of 20,414 shares to mem-
Any voting instruction received from a U.S. Person or bearing a U.S.
bers of the Board of Directors in 2008, 23,421 shares to members of
postmark shall be presumed to evidence a prohibited transfer of the
the Board of Directors in 2009 and 22,589 shares to members of the
shares, or interests therein or rights thereof, as to which such voting
Board of Directors in 2010. 150,000 shares were issued to two em-
instructions relate, and shall, accordingly, be disregarded by the Com-
ployees upon exercise of options in 2008. In 2010, 59,162 restricted
pany and shall be deemed void and of no effect.
shares, vesting ratably through 2015, were issued to members of the executive management.
No exceptions to the restrictions described above have been granted. Please see Section 6.1 below for requirements for changing or elimi-
2.4 Shares and participation certificates
nating restrictions contained in the Certificate of Incorporation or the
See Financial Review, Note C12.
by-laws.
Each registered share of Common Stock carries one vote at the Share-
Synthes, Inc. does not limit or restrict nominee registrations.
holders’ Meeting of Synthes, Inc. and is entitled to dividends. Voting rights may be exercised only after a shareholder has been recorded in
2.7 Convertible bonds and warrants/options
the Company’s share register as a shareholder with voting rights.
The features of the Equity Incentive Plan are detailed in the Financial Review, Note B16 and C12. There are no outstanding bonds or warrants.
Currently, there is no preferred stock issued. The by-laws do not provide for Synthes, Inc. issuing any participation certificates. 2.5 Profit Sharing Certificates
Synthes, Inc. has not issued any profit sharing certificates. 2.6 Limitations on transferability and nominee registrations
The by-laws provide that Synthes, Inc. shall abide by the procedural rules established from time to time by the securities clearing institutions through which the shares of the Company are traded and settled. This does not, however, limit the transferability of the shares. Moreover, the by-laws provide that so long as the shares of stock of the Company are not registered with the United States Securities and Exchange Commission, (i) any transfer or attempted or purported transfer of any shares of stock of the Company or any interest therein or right thereof to any person who is considered a United States person under the Securities Act of 1933 or Securities Exchange Act of 1934 (a “U.S. Person”) shall be prohibited and shall be void and ineffective as against the Company, and (ii) the Company shall not recog-
Corporate Governance
CG3
Corporate Governance
3. Board of Directors
3.1 Members of the Board of Directors
Synthes is led by a strong and experienced Board. The Board includes representatives drawn from broad international business and scientific backgrounds. Its members bring diversity in expertise and perspective to the leadership of a complex, highly regulated, global business. The Board of Directors of Synthes, Inc. consists of between seven and twelve members, the exact number to be set by the Board of Directors. Currently, the Board of Directors of Synthes, Inc. consists of ten members. In April, 2010, Dr. Roland Brönnimann resigned from the Board of Directors and Mr. Daniel Eicher was elected as a Director. Only Messrs. Wyss and Hedgepeth have previously served as members of Synthes, Inc. senior management. The following table sets forth the name, birth year, principal position, time of first election and the remaining term of office of each member of the Board of Directors:
Name
Birth year
Position
First election
Remaining term
Dr. h.c. mult. Hansjörg Wyss (MD)
1935
Chairman – Executive
1999
2012
Charles Hedgepeth
1937
Vice Chairman – Non-Executive
2002
2013
Robert Bland
1940
Non-Executive
1999
2011
Daniel Eicher
1957
Non-Executive
2010
2013
Dr. David Helfet
1947
Non-Executive
2001
2012
Amin Khoury
1939
Non-Executive
1999
2013
André Mueller
1944
Non-Executive
1999
2012
Felix Pardo
1937
Non-Executive
2005
2012
Jobst Wagner
1959
Non-Executive
2005
2013
Amy Wyss
1971
Non-Executive
2008
2011
Dr. h.c. mult. Hansjörg Wyss (MD), Swiss citizen, is Chairman of Syn-
Mr. Charles Hedgepeth, U.S. citizen, has been Vice Chairman of the
thes, Inc. and has held this position since its founding in 1999. From
Board of Directors of Synthes, Inc. since February 2002. Prior to this,
1977 until 2007 he held the position of CEO for Synthes, Inc. and its
he was Board Member and member of the Office of the Chairman.
predecessor organization. Prior to his involvement with the Company,
Since 1989 and preceding his retirement in January 2002, he has
he served in management roles at several European corporations, in-
served the Company and its predecessor organization in a number of
cluding Director of Monsanto Europe SA; President-Managing Director
different roles: He was Vice President of Manufacturing until 1992,
of Schappe-Burlington AG and Assistant to the President of Burlington
Executive Vice President & COO from 1992 until 1995 and President
International. In 2004, Mr. Wyss was awarded his first Honorary Doc-
& COO from 1995 until 2001. Prior to his involvement with the Com-
torate by the University of Basel, Switzerland, and in 2005 honored with
pany, Mr. Hedgepeth served in management roles overseeing opera-
another Honorary Doctorate from Paracelsus Medical University in Salz-
tions and manufacturing at several U.S. corporations. Education: B.Sc.
burg, Austria. In 2009, he was awarded a third Honorary Doctorate of
in Industrial Management, Johns Hopkins University (U.S.A.); Stanford
Engineering by Clemson University, U.S.A. Education: MBA with distinc-
University Executive Program; Certified Manufacturing Engineer.
tion, Harvard Business School (U.S.A.); M.Sc. in Civil and Structural Engineering, Swiss Federal Institute of Technology, Zurich (Switzerland).
CG4
Corporate Governance
Synthes. Annual Report 2010
Mr. Robert Bland, U.S. citizen, is currently President of Dunster &
through a direct global sales and customer support organization. Mr.
Associates Ltd., a healthcare and management consulting firm. Prior
Khoury also serves as a member of the advisory board of the Scripps
to this, he was founder and President of Quality Health, Inc. Between
Research Institute, a world leader in biomedical research, and of the
1990 and 1996, he held the position of President of the New England
Jupiter Medical Center Foundation. He is actively involved in the Insti-
Medical Center (NEMC) Real Estate. Earlier, he was President of
tute for Mobility and Longevity. Education: M.Sc., Chemistry, MBA
Amoskeag Development Corporation, a Boston real estate develop-
with distinction, Northeastern University (U.S.A.).
ment firm. From 1970 and 1986 he was founder, Executive Vice President and CFO of Health Systems, Inc., a healthcare and management
Mr. André Mueller, Swiss citizen, was a co-founder of Actelion in
consulting firm. He is actively involved in non-profit organizations and
1997, where he served as CFO until 2003 and as Vice Chairman un-
serves on the Advisory Board of Thompson Island Outward Bound, a
til 2009. Prior to this position, he was part of the Management Con-
non-profit educational institution, and of Roxbury Preparatory Char-
sulting practice of Deloitte & Touche in Geneva and was a Founding
ter School. Education: B.A., Harvard University (U.S.A.).
Partner and Director of Investments of Genevest, the first Swiss venture capital firm. His previous experience includes the position of CFO
Mr. Daniel Eicher, Swiss citizen, is owner and CEO of ABC Art and
and Vice President of Administration at Biogen, where his responsibil-
Greeting Cards (Switzerland) and Chairman of its holding company
ity included Biogen’s IPO. He started his career with CIBA Ltd. and San-
(R.A.N.D. Holding Ltd.) since 1986. He directed the reorganization of
doz (now Novartis) where he held a number of managerial positions
the biotechnology Group Asklia and its merger with Cytos Biotech-
in planning and finance. Other directorships include Addex Pharma-
nology as Asklia’s Chairman until 2002. Other directorships include
ceutical (Chairman) and Cerenis Therapeutics (Chairman). Education:
Chairman of the Board of Biella-Neher Holding, a Group active in the
Chartered Chemical Engineer, Superior Technical College, Geneva; Li-
development, production and distribution of office products; Vice-
cenciate, Business Economics, University of Geneva (Switzerland);
Chairman of the Board of Ernst Marti Ltd., a leading coach tour op-
MBA, INSEAD (France).
erator in Switzerland; and Director of Schweizerische Mobiliar, one of Switzerland’s leading insurance groups. He is a member of the found-
Mr. Felix Pardo, U.S. citizen. From 1998 until his retirement in 2002,
ing boards of various Swiss charitable social and art organizations in
he was Chairman and CEO of Dyckerhoff Inc. and Chairman of its sub-
Switzerland. Education: B.A. in Business Administration and Market-
sidiaries Lonestar Industries and Glens Falls Cement. In 1998, he was
ing, University of Applied Sciences, Berne (Switzerland).
President and CEO of Philip Services and served on its Board of Directors from 1994 until 2003. From 1992 to 1998, he was President, CEO
David L. Helfet, MD, U.S. citizen, is currently Professor of Orthopae-
and a Director of Ruhr American Coal Corporation. From 1991 until
dic Surgery at Weill Cornell Medical College and Director of the Or-
2009 he was a Director of Newalta. He was CEO during Newalta’s re-
thopaedic Trauma Service at both the Hospital for Special Surgery and
structuring in 1991 and Chairman from 1991 until 1998. Other Direc-
New York-Presbyterian Hospital. Dr. Helfet has served on several com-
torships have included Western Prospector, Exchange National Bank,
mittees of the AAOS and the American Board of Orthopaedic Surgery
Invatec, ISG Technologies and Panaco. Education: B.A. Economics,
and continues to do so. He is a Trustee and on the Board of AO North
Brown University; MBA Finance, Wharton, University of Pennsylvania,
America and the AO Foundation. In addition, he has been extensive-
where he was on the Directors Honors List; MIT Senior Executive Pro-
ly involved in the OTA, including as President, and is still on its Board
gram under sponsorship of Arthur D. Little (all U.S.A).
as a past President. Education: B.Sc. with honors in Biochemistry, University of Cape Town; M.B.Ch.B., University of Cape Town Faculty of
Mr. Jobst Wagner, Swiss citizen, is the President of the Supervisory
Medicine (South Africa); Orthopaedic Residency, Johns Hopkins Hos-
Board of the Rehau Group, a leading polymer manufacturer and sys-
pital (U.S.A.), Trauma Fellowship, Inselspital, Bern (Switzerland), Sports
tems supplier in construction, automotive and industry, headquar-
Fellowship, University of California, L.A. (U.S.A.).
tered in Muri, Switzerland. He has held this position since 2000, after becoming a member of the Executive Committee in 1993 and
Mr. Amin Khoury, U.S. citizen, is founder, Chairman and CEO of B/E
holding various functions within the Rehau organization, especially
Aerospace, Inc. (B/E), the world’s largest manufacturer of equipment
in purchasing and logistics. Mr. Wagner has been a member of the
for the passenger cabins of both commercial airliners and business
Board of the Swiss private bank Von Graffenried AG since 1997 and
jets. B/E designs, develops and manufactures aircraft seating, lighting
Von Graffenried Holding since 2008. In addition, he has been serv-
and oxygen products, as well as aircraft food and beverage prepara-
ing as President of the Kunsthalle Foundation since 2003 and has
tion and storage equipment. B/E sells and services its equipment
been a member of the Board of the Foundation of the Museum of
Corporate Governance
CG5
Corporate Governance
Fine Arts Berne since 1994. He is member of several other cultural
3.5 Internal organizational structure
and art foundations in Switzerland. Education: LL.M. University of
The Board of Directors is ultimately responsible for the general poli-
Berne (Switzerland).
cies and management of Synthes, Inc. The Board of Directors establishes the strategic, organizational, accounting and financing policies
Ms. Amy E. Wyss, U.S. and Swiss citizen, represents the Wyss Family
to be followed by Synthes, Inc. and the other Group companies. The
interest in Synthes, Inc. and is a trustee and beneficiary of the Wyss
Board of Directors has delegated the conduct of the day-to-day busi-
familiy trusts. She serves on the Board of Directors of the Wyss Foun-
ness operations to the Group Management Committee, which is head-
dation, an environmental foundation, whose mission is to preserve
ed by the Chairman of the Board of Directors. The Chairman, Hansjörg
and protect open land in the Western United States. She is active in
Wyss, the sole executive member of the Board of Directors, is respon-
leading several non-profit organizations: Since 2007 she has been a
sible for the overall management of the Group companies. The Board
member of the Board of Trustees of the National Outdoor Leadership
of Directors met four times in 2010. Three of the meetings were ap-
School NOLS, a non-profit education school dedicated to teaching en-
proximately two days in length, while the remaining meeting was one
vironmental studies, technical outdoor skills, safety, judgment and
day in length.
leadership. She is a founding board member of the Golden Willows Retreat, a grief counseling center in New Mexico and the founder and
Tasks and area of responsibility for each committee
owner of Twirl Toy Store, New Mexico. Education: B.A. in History and
The Board of Directors has established an Audit Committee and a
Government, Skidmore College (U.S.A.).
Compensation Committee from its members. A person elected by the Board of Directors chairs each committee. The committees meet reg-
3.2 Other activities and vested interests
ularly and make full reports and recommendations to the Board of
Information concerning other activities of each member of the Board
Directors at its regular meetings. Committee chairpersons set the agen-
of Directors can be found in section 3.1. The activities performed by
da for committee meetings. The members of the board committees
the non-executive Directors, apart from their duties as members of
receive, in advance of committee meetings, documents allowing them
the Board, are not directly related to the Company. Furthermore, the
to prepare for the items on the agenda.
Group has no significant business connection with any company or organization represented by a member of the Board of Directors, ex-
Succession planning and nomination for top positions within the
cept as disclosed in the Financial Review, Note C17.
Group are performed by the full Board of Directors, who take an active role in selecting and nominating the top positions within the
3.3 Cross-involvement (repealed) 3.4 Elections and terms of office
The Board of Directors of Synthes, Inc. is elected at the Annual General Meeting (AGM) of shareholders. The Certificate of Incorporation provides that the Board of Directors must consist of between seven and twelve members at any time. Each member of the Board of Directors is normally elected for a term of three years and may be reelected to successive terms. The Board of Directors is divided into three classes, with the term of office of one class expiring each year (i.e. staggered terms). At each AGM, the successors to the class of directors, whose term is then expiring, are elected to hold office for a term expiring at the third succeeding AGM following their election or such shorter term as proposed by the Board of Directors to ensure annual re-election of approximately one third of the Directors. There is no age restriction as to the election or retention of a Director; however, a Director may be removed by the shareholders with or without cause at any time. The Directors standing for election are elected by global vote.
CG6
Corporate Governance
Group.
Synthes. Annual Report 2010
Allocation of tasks within the Board of Directors and members list
Name
Chairman/Vice-Chairman
Dr. h.c. mult. Hansjörg Wyss (MD)
Audit Committee
Compensation Committee
(Chair)
Charles Hedgepeth Robert Bland Daniel Eicher Dr. David Helfet Amin Khoury André Mueller
(Chair) (Chair)
Felix Pardo Jobst Wagner Amy Wyss
Audit Committee
The annual internal audit plan will also analyze risks associated with
The Audit Committee acts in an advisory capacity to the Board of Direc-
the following:
tors and consists of three persons. André Mueller is the Chairman and
– achievement of business goals and objectives
the other members are Robert Bland and Felix Pardo. The present mem-
– business process optimization
bers of the Audit Committee are non-executive members of the Board
– effectiveness of risk management, control and governance processes
of Directors and are experienced in financial and accounting matters.
– safeguarding of assets
The Audit Committee met four times and, additionally, held several tele-
– compliance with legal and regulatory requirements
phone conferences in 2010. Each meeting was approximately four hours
– data systems control and process
long. The principal responsibilities of the Audit Committee are:
– accounting system controls and processes
– to discuss the auditor’s yearly reports with particular emphasis on
– authorization of transactions
the annual financial statements (both statutory and consolidated)
– significant or unusual transactions
and to present conclusions to the Board
– other areas of significance as determined by the audit committee
– to review and assess the auditing concept, examination process, examination instruments, Internal Audit Plan and examination pro-
Compensation Committee
grams
The Compensation Committee consists of three persons: Amin Khoury
– to discuss Synthes’ internal accounting procedures
(Chairman), David Helfet and Jobst Wagner. The Compensation Com-
– to support the Board of Directors in its supervision of financial con-
mittee assists the Board of Directors in discharging its responsibilities
trol through a direct link to Ernst & Young LLP (external auditors)
relating to all compensation, including equity compensation of Com-
and the Internal Audit Group
pany executives. The Committee evaluates and makes recommenda-
– to keep itself regularly informed on important findings of the audits and of their progress
tions to the Board regarding employee compensation, compensation under the Company’s Equity Incentive Plans and other Company com-
– to support the Board of Directors in its oversight of the global com-
pensation policies and programs. The Committee utilizes compensa-
pliance program through a direct link with the Chief Compliance
tion survey data compiled by outside consultants to review the Group’s
Officer
executive compensation. All decisions of the Compensation Committee are subject to approval by the Board of Directors. During 2010,
The Board of Directors has established an Internal Audit Group that
the Compensation Committee met four times, and in each case pro-
reports directly to the Audit Committee. The Audit Committee peri-
vided the Board of Directors a report on its findings and recommen-
odically reviews and assesses the adequacy of the internal audit orga-
dations. Each meeting was approximately ninety minutes in length.
nizational structure, the internal audit scope, the audit plan and rele-
Members of management attend meetings of the Compensation Com-
vant processes, and whether recommended improvements have been
mittee at the discretion of the Compensation Committee.
implemented by the management in charge.
Corporate Governance
CG7
Corporate Governance
Full Board
Audit Committee
Compensation Committee
Number of meeting days in 2010
7
4
4
Dr. h.c. mult. Hansjörg Wyss (MD)
7
-
-
Charles Hedgepeth
7
-
-
Robert Bland
5
4
-
Dr. Roland Brönnimann
3
-
-
Daniel Eicher
5
-
4
Dr. David Helfet
7
-
4
Amin Khoury
7
-
4
André Mueller
7
4
-
Felix Pardo
7
4
-
Jobst Wagner
7
-
4
Amy Wyss
7
-
-
Work methods of the Board of Directors and its Committees
agenda. The members of the Board receive documents in advance of
The Board meets as often as necessary, at least quarterly, and on no-
the board meeting which allow the members of the Board to prepare
tice by the Chairman or by a person designated by him. In addition,
for the items on the agenda. Members of the Group Management
the Board must be convened as soon as a Board member requests the
Committee generally attend the quarterly meetings of the Board of
Chairman for a meeting. The average attendance at the 2010 Board
Directors. Outside advisors attend meetings of the Board of Directors
meetings was 94%. Each committee reports to the Board of Directors
from time to time at the discretion of the Board.
following each committee meeting. The Board of Directors holds discussions with officers of Synthes, Inc. 3.6 Definition of areas of responsibility
and visit at least once per year one or more offices and plants.
The primary duties of the Board of Directors are as follows: – issuance of guidelines for business policy
3.7 Information and control instruments vis-à-vis
– establishment of policies and procedures concerning accounting
the Group Management Committee
and financial control as well as financial planning
The Board of Directors uses several tools to be kept informed about
– approval, dismissal and supervision of members of senior management
Group operations and exercise control over senior management:
– supervision of preparation of the annual report of the Corporation
– The Board of Directors receives a monthly financial report generat-
– approval of any bankruptcy filing or compromise or arrangement
ed by the Synthes management information system. The report is
with creditors in the case of insolvency
comprised of consolidated financial information and includes: a) an
– approval of the strategic direction of the Companies
Income Statement, Balance Sheet, and Cash Flow Statement, in-
– approval of changes of business activities
cluding a comparison of each to budgeted and prior year figures;
– approval of the establishment of new businesses and closing of
b) management performance comments; and c) communication of
businesses in excess of US$ 5 million – approval of the purchase or sale of assets in excess of US$ 6 million with the exception of machinery and equipment – determination of the general framework, amount and time frame of bond issues – approval of new long-term and short-term bank debt in excess of US$ 10 million
key issues. – Members of the Group Management Committee generally attend quarterly meetings of the Board of Directors, and the Chief Financial Officer and the Chief Compliance Officer attend meetings of the Audit Committee. – The internal audit function reports directly to the Chairman of the Audit Committee and is comprised of auditors who travel world-
– approval of the yearly operational and consolidated investment budget
wide, completing audit assignments developed and assigned by the
The Group Management Committee is responsible for the operation-
– The compliance function reports to the CEO and is comprised of
al management of the Group, subject to the foregoing responsibilities
compliance professionals who develop compliance policies, moni-
reserved to the Board of Directors.
tor reports regarding compliance matters and conduct investiga-
Audit Committee.
tions into compliance matters. The Chairman sets the agenda for board meetings. Any member of the Board of Directors may request that an item be included on the CG8
Corporate Governance
– Synthes has a risk management process whereby key risks are identified and communicated to senior management.
Synthes. Annual Report 2010
4. Group Management Committee
4.1 Members of the Group Management Committee
The following table sets forth the name, birth year and principal positions of those individuals who were members of the Group Management Committee as of December 31, 2010: Name
Birth year
Position
Dr. h.c. mult. Hansjörg Wyss (MD)
1935
Chairman
Michel Orsinger
1957
President and Chief Executive Officer
Robert Donohue
1947
Chief Financial Officer
Ciro Römer
1962
President Europe, Middle East and Africa & Global Operations
Dr. h.c. mult. Hansjörg Wyss (MD), Swiss citizen, is Chairman of Syn-
4.2 Other activities and vested interests
thes, Inc. and has held this position since its founding in 1999 (see
The respective information can be found for each member of the
section 3.1 above).
Group Management Committee in Section 4.1 above.
Mr. Michel Orsinger, Swiss citizen, is the President and has held the
4.3 Management contracts
position of CEO of Synthes, Inc. since 2007. He joined the Company
Synthes, Inc. and its subsidiaries have not entered into any manage-
in 2004 when he was retained as Chief Operating Officer. Prior to
ment contracts with third parties.
this, he spent ten years with Novartis in various executive management positions, most recently as President and CEO of OTC Worldwide. Mr. Orsinger served as a member of the Nobel Biocare Board of Directors from 2004 to 2006. Education: Business Administration Degree, University of St. Gallen (Switzerland); Advanced Management Program, Harvard Business School (U.S.A.); Advanced Management Program, INSEAD (France). Mr. Robert Donohue, U.S. citizen, has held the position of CFO of
Synthes, Inc. since 1998. He is responsible for Synthes, Inc.’s financial reporting, internal controls and related issues. Additionally, he holds the position of President, Synthes Canada, Ltd. Prior to this, Mr. Donohue held the position of Vice President of Finance for Synthes (U.S.A). He has been with Synthes since 1990 when he was retained as Corporate Controller. Prior to joining the Company, he served in several financial positions, including corporate controller and plant controller with several major U.S. corporations. Education: B.Sc. in Economics, West Chester University; MBA, Widener University (both U.S.A.); Certified Public Accountant. Mr. Ciro Römer, Dutch citizen, has been the President of Europe, Mid-
dle East and Africa since 2003 and additionally has held the position of President Global Operations since 2008. Prior to this, he held the positions of Vice President Europe as well as General Manager for the Netherlands and Spain. Between 1983 and 1998 Mr. Römer held various positions at the OLVG clinic and at Howmedica. He has over twenty years experience in the orthopedic industry. Education: Radulphus College (Netherlands); Advanced Management Program, Harvard Business School (U.S.A.).
Corporate Governance
CG9
Corporate Governance
5. Compensation, Shareholdings and Loans
5.1 Content and method of determining the compensation
the compensation of the members of the Group Management Com-
and the share-ownership programs
mittee, a variety of factors are taken into account, including individual performance, competencies, skills, future potential, prior experi-
Board of Directors
ence, scope of responsibility and accountability within the organization.
The compensation of members of the Board of Directors is reviewed periodically, but not less than annually by the Board of Directors based
The objectives of the compensation program are:
upon recommendation of the Compensation Committee. The Com-
1. To ensure a relationship between pay and performance, including
pensation Committee establishes its recommendations by accessing
both rewards for results that meet or exceed performance targets
survey data of the compensation received by a similarly situated peer
and consequences for results that are below performance targets.
group, comprised of global companies conducting business in the life
2. Align executive and shareholder interests through the provision of
sciences industry. Directors receive a fixed annual 1,500 share award
incentives that link executive compensation to company perfor-
(1,700 for the Vice Chairman). In addition, fixed annual fees are paid
mance.
to members of each committee of the Board of Directors. From time
3. Provide a total compensation package that is competitive with the
to time, the Board Members may receive compensation for other
global medical devices and pharmaceutical market for senior level
Company-related services.
executive talent, thereby enabling the Company to attract, retain and motivate executives.
The cash remuneration paid and the number of shares earned under the Plan to each member of the Board of Directors during 2010 can
The major elements of the Company’s compensation program are
be found in the Financial Review, Note C24.
base salary, an executive bonus plan, equity incentives and severance: 1. Base Salary: The Company provides each member of management
The Group also reimburses reasonable expenses incurred by mem-
with a competitive fixed annual cash base salary. The base salaries
bers of the Board of Directors in attending meetings.
are reviewed annually by the Compensation Committee generally taking into account the results achieved by the executive, the exec-
Group Management Committee
utive’s future potential, scope of responsibilities, experience and com-
The Compensation Committee reviews the compensation of the
petitive salary practices. The Company generally does not set fixed
members of the Group Management Committee and senior mem-
and specific criteria to determine the base salaries. However, the Com-
bers of management at least annually. The Chairman of the Compen-
pensation Committee’s assessment of each individual’s contribution
sation Committee provides its reports to the Board of Directors at
to the Company’s growth, generation of revenue and market pene-
each of the Board’s meetings. The Board of Directors determines the
tration may be taken into consideration in determining salary.
compensation of both the Chairman and the Chief Executive Officer.
2. Executive Bonus Plan: The Company has a Global Executive Bonus
The Chairman, although not a member of the Compensation Com-
Plan which provides annual cash incentives based on company per-
mittee may attend meetings as a guest. As a non-voting guest of the
formance. The value of units under the plan changes as the Com-
Committee, the Chairman may offer input regarding compensation
pany’s net earnings before tax changes. In addition, the Company
of the Chief Executive Officer and senior members of management,
reserves the right to decrease the paid value of the individual’s bo-
including the Group Management Committee. The Board of Direc-
nus, based upon individual performance. Thirty percent of the com-
tors reviews and approves the Chief Executive Officer’s recommen-
pensation earned under the bonus plan is deferred (unless the par-
dations for the compensation of other members of the Group
ticipant elects to defer a larger portion) and paid upon retirement
Management Committee. In consultation with the Compensation
or upon a separation from service. The remainder is paid in cash.
Committee, the Chairman and the Chief Executive Officer determine
The value of units which are automatically deferred (30%) vests rat-
the compensation for persons reporting directly to either of them.
ably over three years. Under this plan, executives are assigned a
The Compensation Committee relies on publicly available informa-
number of units. The unit values are calculated by reference to the
tion, compensation survey data and, as necessary, engages indepen-
Company’s Consolidated Earnings Before Income Taxes. The unit
dent consulting firms to assist in overseeing the executive compensa-
values may fluctuate annually, both upwards and downwards based
tion program. Survey data provides a reference for decisions about
on company performance.
the appropriate level of incentives to be provided to senior manage-
3. Equity Incentives: In 2010, the Board of Directors reauthorized an
ment. The survey data is drawn from global life sciences companies
Equity Incentive Plan for directors and employees which allows for
with revenues generally comparable to the Company’s. In considering
the issuance of up to 1,500,000 shares of Common Stock. The pur-
CG10
Corporate Governance
Synthes. Annual Report 2010
pose of the Equity Incentive Plan is to provide the members of the
contracts of two members of the Group Management Committee
Board of Directors and other key employees added incentives to
contain the right to compensation if their employment agreement
continue in the long-term service of the Company and to create in
is terminated by the Company without cause or by the employee
such persons a more direct interest in the future success of the op-
for good reason. The compensation consists of two years of base
erations of the Company by relating incentive compensation to in-
salary and payments under the Executive Compensation Plan.
creases in shareholder value and to provide a financial incentive that will help the Company attract, retain and motivate the most quali-
Share ownership
fied directors and employees. During 2010, the Company granted
The number of Synthes, Inc. shares held by all members of the Board
Restricted Stock and Stock Options to certain senior members of
of Directors and the Group Management Committee, including par-
the Company’s global management as part of a long-term reten-
ties closely linked to such persons, is 57,801,959 (including shares held
tion and incentive program. The Restricted Stock and Stock Options
by the Wyss family trusts, for which Amy Wyss is a beneficiary). “Per-
Grants vest over periods ranging from three to five years. The grants
sons closely linked to them” are: (i) their spouse, (ii) their children un-
are made at the discretion of the Board of Directors upon recom-
der age 18, (iii) any legal entities that they own or otherwise control,
mendations made by the Compensation Committee. The exercise
or (iv) any legal or natural person who is acting as their fiduciary.
price of the Stock Options is the share price at the close of the Swiss Exchange on the date of the grant. The features of the Equity In-
The total number of shares held by the nine non-executive members of
centive Plan are further detailed in the Financial Review, Note B16
the Board of Directors and parties closely linked to such persons amount-
and C12. The variable component of compensation to members of
ed to 9,977,179 (including shares held by the Wyss family trusts).
the Group Management Committee is between 100 and 600 percent of the fixed component.
Options held
4. Severance: The Company does not have a standardized severance
As of December 31, 2010, the members of the Board of Directors do
plan. No severance payments were made to members of the Group
not hold options. Members of the Group Management Committee,
Management Committee or other senior executives pursuant to
including the parties closely linked to them, held the number of op-
employment contracts during the reporting year. The employment
tions on shares of Common Stock as indicated in the chart below:
No. of options
50,000 100,000 50,000 125,000 30,000
Grant date
Vesting schedule
Vested / Unvested
Exercise price
Exercise period
March 10, 2006
Vested ratably through 2010
50,000 / 0
CHF 140.00
10 years
February 19, 2008
Vested ratably through 2013
50,000 / 50,000
CHF 139.10
10 years
August 22, 2008
Vested ratably through 2013
25,000 / 25,000
CHF 151.50
10 years
July 15, 2009
Vested ratably through 2014
50,000 / 75,000
CHF 105.50
10 years
February 10, 2010
Vested ratably through 2015
0 / 30,000
CHF 132.40
5 years
5.2 Transparency of compensation for, shareholdings of and loans to issuers domiciled abroad
Specific information concerning actual compensation paid to members of the Board of Directors and the Group Management Committee during 2010, as required by Article 663b bis of the Swiss Code of Obligations, can be found in the Financial Review, Note C24.
Corporate Governance
CG11
Corporate Governance
6. Shareholders’ Participation
6.1 Voting rights and representation restrictions
rights. Each shareholder entitled to vote at a meeting of shareholders
Pursuant to the Certificate of Incorporation, any person who, direct-
may authorize another person or persons to act for him by proxy, but
ly or indirectly, owns 5% or more of the outstanding shares of Com-
no such proxy shall be voted or acted upon after three years from its
mon Stock who does not disclose his stock ownership and other re-
date, unless the proxy provides for a longer period. The proxy holder
lated information will be entitled to exercise only a maximum of 5%
need not be a shareholder. A proxy shall be irrevocable if it states that
of the voting power eligible to be cast at a meeting of shareholders,
it is irrevocable and if, and only as long as, it is coupled with an inter-
as adjusted for the number of votes deducted from the voting pow-
est sufficient in law to support an irrevocable power. A shareholder
er of all shareholders whose voting power is reduced by virtue of such
may revoke any proxy which is not irrevocable by attending the meet-
provision. Any shareholder who discloses his full stock ownership will
ing and voting in person or by filing an instrument in writing revok-
have full voting rights.
ing the proxy or by delivering a subsequent proxy in accordance with applicable law bearing a later date to the Secretary of the Company.
Each share of Common Stock bears one vote. The by-laws of the Company provide that so long as restrictions on transfers of shares of Com-
6.2 Statutory quorums
mon Stock to U.S. persons are in effect, any voting instructions re-
All decisions taken at the meeting of shareholders require the affirma-
ceived from a U.S. person or bearing a U.S. postmark (other than those
tive vote of the holders of at least a majority of the Common Stock
U.S. persons who purchased shares of Common Stock (i) pursuant to
present or represented and entitled to vote. For the election of direc-
Rule 144A of the U.S. Securities Act or (ii) pursuant to a private place-
tors, a plurality of the votes cast is sufficient. A majority of the out-
ment exemption under the U.S. Securities Act in connection with the
standing Common Stock entitled to vote is required for certain fun-
combination of the Group and Stratec, or transferees of such persons
damental corporate transactions, such as amendments to the
who obtained their shares pursuant to an exemption from registration
Certificate of Incorporation, certain mergers, sales of all or substan-
under the U.S. Securities Act) shall be presumed to evidence a prohib-
tially all of the Company’s assets and dissolution of the Company.
ited transfer of the shares of Common Stock, or interests therein or rights thereof, to a U.S. person, as to which such voting instructions
The Certificate of Incorporation and by-laws of the Company follow
relate and shall be disregarded by the Company.
the voting requirements of the Delaware General Corporate Law but contain some additional voting requirements: an affirmative vote of
No exceptions to the restrictions described above have been granted.
holders of at least 80% of the shares entitled to vote, present in
Restrictions contained in the Certificate of Incorporation or the by-laws
person or represented by proxy, is required to approve specified trans-
can be changed or eliminated only by amending those documents.
actions, including (i) amendment of provisions restricting share issu-
Amendment of the by-laws can be effected by the Board of Directors
ances not approved by shareholders, (ii) amendment of provisions
or by the shareholders. Amendment of the by-laws by the Board of Di-
granting pre-emptive rights, (iii) amendment of provisions dividing the
rectors requires a majority vote of the members of the Board of Direc-
Board of Directors into three classes, each elected for three-year stag-
tors present at a meeting attended by a majority of all Directors.
gered terms, (iv) amendment of provisions limiting director liability and
Amendment of the by-laws by the shareholders requires the affirma-
granting indemnification rights, and (v) amendment of provisions pro-
tive vote of the holders of at least a majority of the Common Stock
hibiting shareholder action outside the meeting of shareholders. An
present or represented and entitled to vote at a meeting at which at
affirmative vote of the holders of at least 66 2/3% of the outstanding
least one-third of all voting shares are represented. In order to effect
shares entitled to vote is required to authorize certain transactions
an amendment of the Certificate of Incorporation, the majority of the
with major shareholders.
Board of Directors present at a meeting attended by a majority of all Directors must first adopt a resolution setting forth the amendment,
6.3 Convocation of the general meeting of shareholders
declaring its advisability and providing for consideration of the amend-
The Annual General Meeting of Shareholders will be held on April 28,
ment at a meeting of the shareholders. The amendment must then be
2011. Annual meetings of Shareholders are held at such date, time
adopted by the vote of the holders of a majority of the Common Stock
and place as may be designated by resolution of the Board of Direc-
represented at the meeting and entitled to vote. Different voting re-
tors from time to time.
quirements apply to certain actions, as described in Section 6.2 below. Notices of shareholder meetings may be given by mail and must state Voting rights may be exercised only after a shareholder has been re-
the place, date and hour of the meeting and, in the case of a special
corded in the Company’s share register as a shareholder with voting
meeting, the purpose or purposes for which the meeting is called. No-
CG12
Corporate Governance
Synthes. Annual Report 2010
tices must be given not less than twenty nor more than sixty days be-
6.5 Inscriptions into the share register
fore the date of the meeting.
Shareholders holding registered shares as of March 3, 2011 (record date) will be able to attend and vote at the Shareholders’ Meeting.
6.4 Agenda: Shareholder proposals
No exceptions have been granted or could be granted without amend-
A proposal of business to be considered by the shareholders may be
ing the by-laws. An invitation with the proposals of the Board of Di-
made at an annual meeting of shareholders (a) pursuant to the Com-
rectors is available through the Company’s website at www.synthes.com
pany’s notice of meeting delivered pursuant to the by-laws, (b) by or
and will be published in leading Swiss newspapers as well as the Swiss
at the direction of the Chairman of the Board or the Board of Direc-
Official Gazette of Commerce (SOGC). Shareholders can ask for their
tors, or (c) by any shareholder of the Company who is entitled to vote
admission card through their broker and will receive the admission
at the meeting, who has complied with the requirements and proce-
card and voting materials after April 15, 2011.
dures set forth in the By-laws (and summarized below) and who was a shareholder of record at the time such notice is delivered to the Secretary of the Company. The by-laws of Synthes, Inc. require that certain procedures be observed by a shareholder submitting a proposal at an annual meeting of shareholders in order for the proposal to be included in the meeting agenda. The shareholder must file, within the appropriate time as provided in the by-laws, with the Corporate Secretary a written statement setting forth specified information, including (1) a brief description of the proposal and the reasons for bringing such business before the annual meeting, (2) the name and address of the shareholder making the proposal and the beneficial owner, if any, on whose behalf the proposal is made, (3) the class and number of shares of Common Stock of Synthes, Inc. owned beneficially and of record by such shareholder and such beneficial owner, (4) any material interest of the shareholder and such beneficial owner in such business and (5) whether the proponent intends or is part of a group which intends to solicit proxies from other shareholders in support of such proposal. For a proposal to be considered timely, a shareholder’s notice shall be delivered to the Secretary at the principal executive offices of the Company not less than seventy days nor more than ninety days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than twenty days, or delayed by more than seventy days, from such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made.
Corporate Governance
CG13
Corporate Governance
7. Changes of Control and Defense Measures
7.1 Duty to make an offer
then outstanding voting securities of the Company entitled to vote
The Company has adopted a Shareholder Rights Plan (the “Rights
generally in the election of directors, or (ii) at any time during any pe-
Plan”). The Rights Plan provides for the Company to issue rights to
riod of three consecutive years, individuals who at the beginning of
purchase shares of Preferred Stock (“Rights”) to all existing sharehold-
such period constitute the Board (any new director whose election by
ers, such Rights to become exercisable if a shareholder (an “Acquir-
the Board or whose nomination for election by the Company’s share-
ing Person”) acquires or agrees to acquire 33 1/3% of the outstanding
holders was approved by a vote of at least two-thirds of the directors
shares of the Company without at the same time making an offer to
then still in office who either were directors at the beginning of such
purchase the shares of the remaining shareholders at terms accept-
period or whose election or nomination for election was previously so
able to the Board of Directors. The substantive effect of the Rights is
approved) cease for any reason to constitute a majority thereof.
to allow all shareholders of the Company, other than the Acquiring Person, to acquire an interest in a share of Preferred Stock that approximates the value of one share of Common Stock of the Company for half-price, thereby substantially diluting the value of existing Common Stock. This plan is designed to enhance the Board of Directors’ ability to protect shareholders against, among other things, unsolicited attempts to acquire control of the Company that do not offer an adequate price to all shareholders or are otherwise not in the best interests of Synthes, Inc. and its shareholders. Since the Acquiring Person will not be entitled to exercise any Rights, the Rights Plan in effect dilutes the position of the Acquiring Person. However, the Rights will not be exercisable if the Board of Directors approves the transaction by which the Acquiring Person acquired its shares. Similarly, the Rights will not be exercisable if such acquisition of 33 1/3% results from a tender offer for all outstanding shares of Common Stock at a price at least as high as the price at which shares of Common Stock are trading on the SIX Swiss Exchange and which is not less than 25% below the highest price paid by such person for any shares during the preceding twelve months. 7.2 Clauses on changes of control
In accordance with the provisions of the Equity Incentive Plan approved by the shareholders in April 2000 and renewed in 2010, unless provided otherwise by the Compensation Committee at the time of the grant of an Award, upon a change of control of Synthes, Inc. then (i) all options shall become immediately exercisable in full during the remaining term thereof, and shall remain so, whether or not the Participants to whom such options have been granted remain employees or consultants of the Company, (ii) all restrictions with respect to outstanding Restricted Stock Awards shall immediately lapse, (iii) all Stock Units shall become immediately payable, and (iv) all other awards shall become immediately exercisable or shall vest, as the case may be, without any further action or passage of time. For purposes of this Plan, a “change of control” shall be deemed to have occurred if either (i) any individual, entity, or group or a trustee or other fiduciary holding securities under an employee benefit plan of the Company, acquires beneficial ownership of fifty percent or more of either (A) the then outstanding shares of Stock or (B) the combined voting power of the
CG14
Corporate Governance
Synthes. Annual Report 2010
8. Auditors
8.1 Duration of the mandate / Term of office of the lead auditor
In 2004, Ernst & Young LLP assumed the existing auditing mandate of the Group. The appointment of the auditor is for one year, renewable annually. The partner in charge of the audit engagement assumed this responsibility in 2008. The partner in charge of the audit engagement is rotated at least once every seven years. 8.2 Auditing fees
The auditing fees charged for 2010 were US$ 2.7 million, which included fees associated with the annual financial statement audit, statutory audits of local Synthes subsidiaries required internationally, and internal control over financial reporting attestation services. 8.3 Additional fees
Synthes, Inc. and Ernst & Young have agreed on clear guidelines as to professional services which it is appropriate for Ernst & Young to provide. These services include due diligence on mergers, acquisitions and disposals and tax compliance and tax consulting services. These guidelines help to ensure Ernst & Young’s independence in their capacity as auditors to the Group. Additional fees charged by the Group’s auditors in 2010 amounted to US$ 0.6 million. This included audit-related services, tax services (including tax compliance) and all other services. 8.4 Information instruments pertaining to the external audit
The Audit Committee, on behalf of the Board of Directors, is responsible for monitoring the performance of the auditors and meets with the auditors to review the planned scope and results of their audit. The Audit Committee meets regularly with the external and internal auditors. The auditors attend at least two meetings of the Audit Committee each year, and may attend additional meetings of the Board of Directors and the Audit Committee as needed. The auditors present to the Audit Committee a detailed report on the conduct of the financial statement audit, the findings on significant financial accounting and reporting issues together with the findings on the internal control system. In 2010, Ernst & Young participated in four Audit Committee meetings at the end of which they met with the Audit Committee without the Group’s management being present. The Audit Committee of the Board of Directors annually assesses the performance, compensation and independence of the auditors and submits for Board approval a proposal as to which external auditor shall be engaged and submitted for ratification at the Shareholders’ Meeting.
Corporate Governance
CG15
Corporate Governance
9. Information Policy
Synthes, Inc. is committed to a transparent information policy for the benefit of the public and capital markets. Synthes, Inc.’s objective is to ensure that the perception of those parties about the historical record, current performance and future prospects of Synthes is in line with management’s understanding of the actual situation at Synthes. In general, Synthes, Inc. publishes full financial results on a half-annual basis. The full-year results are generally released in February, the interim report in August. Sales results are reported on a quarterly basis. The first quarter sales results are generally published in April and the third quarter sales results in October. Synthes, Inc. has established a website at http://www.synthes.com/ html/News.4356.0.html to ensure a rapid and equitable distribution of information. Therefore, press releases and presentations are available on the website as they are published and remain on the site as a library of background information on the Group. The website also includes a schedule of planned media conferences. Synthes does not rely solely on people visiting the site to be updated on the latest developments with the Group; anyone can sign up on the site to get media releases sent to his or her e-mail address. Securities transactions made in 2010 by qualifying members of the Company’s management, which are required to be disclosed by the Company and published by the SIX Swiss Exchange, may be found at http://www.six-exchange-regulation.com/obligations/management_ transactions/notifications_en.html. Shareholders may direct investor relation inquiries to: Synthes Investor Relations Glutz-Blotzheim-Strasse 3 4500 Solothurn Switzerland Tel. +41 32 720 46 38
[email protected]
CG16
Corporate Governance
Synthes. Annual Report 2010
Financial Review
Report of Independent Auditors FR2 Report of Independent Accountants FR3 Consolidated Balance Sheets FR4 Consolidated Statements of Operations FR6 Consolidated Statements of Changes in Stockholders’ Equity FR7 Consolidated Statements of Cash Flows FR8 Notes to the Consolidated Financial Statements – Notes A FR10 Notes to the Consolidated Financial Statements – Notes B FR11 Notes to the Consolidated Financial Statements – Notes C FR19 Note to Directors and Shareholders FR47 Investor Key Data FR48
Financial Review
FR1
Financial Review
Report of Independent Auditors
Board of Directors and Shareholders Synthes, Inc. We have audited the accompanying consolidated balance sheets of Synthes, Inc. and subsidiaries (the Group) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Group’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Philadelphia, Pennsylvania February 16, 2011
FR2
Financial Review
Synthes. Annual Report 2010
Report of Independent Accountants
Board of Directors Synthes, Inc. We have examined the suitability of Synthes, Inc.’s design of internal control over financial reporting to prevent or detect material misstatements in the financial statements on a timely basis as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO criteria). Synthes, Inc.’s management is responsible for the suitable design of internal control over financial reporting. Our responsibility is to express an opinion on the design of internal control based on our examination. Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of internal control over financial reporting, evaluating the design of internal control, and performing such other procedures as we considered necessary in the circumstances. Our procedures included performing walkthroughs to test for the existence of internal controls. We believe that our examination provides a reasonable basis for our opinion. We were not engaged to examine and report on the operating effectiveness of Synthes, Inc.’s internal control over financial reporting as of December 31, 2010, and, accordingly, we express no opinion on operating effectiveness. Because of inherent limitations in any internal control, misstatement due to error or fraud may occur and not be detected. Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Synthes, Inc.’s internal control over financial reporting is suitably designed, in all material respects, to prevent or detect material misstatements in the financial statements on a timely basis as of December 31, 2010, based on the COSO criteria.
Philadelphia, Pennsylvania February 16, 2011
Financial Review
FR3
Financial Review
Synthes, Inc. and Subsidiaries
Consolidated Balance Sheets as of December 31, 2010 and 2009
Assets Current assets Cash and cash equivalents Marketable securities
2010
2009
in 1,000 US$
in 1,000 US$
736,565
1,419,246
1,254,683
-
706,127
613,225
Accounts receivable Trade, less allowance of US$ 31.9 million and US$ 25.0 million in 2010 and 2009, respectively Other
99,294
77,514
520,867
525,499
Prepaid expenses and other current assets
44,096
26,368
Deferred income taxes
53,269
42,428
3,414,901
2,704,280
893,817
743,885
and US$ 236.7 million in 2010 and 2009, respectively
2,119,322
1,911,541
Goodwill
1,293,082
1,138,238
78,522
56,797
Inventories, net
Total current assets Property, plant and equipment, net Other assets Intangible assets, less accumulated amortization of US$ 303.1 million
Other assets Deferred income taxes
123,972
103,877
Total other assets
3,614,898
3,210,453
Total assets
7,923,616
6,658,618
FR4
Financial Review
Synthes. Annual Report 2010
Liabilities and stockholders’ equity Current liabilities Current maturities of long-term debt Accounts payable Income taxes payable Accrued payroll and other compensation and benefits including withholding taxes and pensions Accrued taxes other than income and payroll
2010
2009
in 1,000 US$
in 1,000 US$
121
527
48,727
42,194
40,230
90,208
196,356
178,702
44,157
37,410
153,986
142,755
Current acquisition-related liabilities
51,540
45,155
Deferred income taxes
19,518
19,408
554,635
556,359
Accrued expenses other
Total current liabilities Long-term debt, net of current maturities
98,297
2,716
Long-term acquisition-related liabilities
26,431
70,662
61,706
28,693
Employee benefits and pension liabilities Other long-term liabilities
128,881
81,588
Deferred income taxes
314,997
280,431
1,184,947
1,020,449
Total liabilities Stockholders’ equity Common stock CHF 0.001 par value; shares authorized – 150,000,000; shares issued – 2010 – 118,777,075; 2009 – 118,717,913; shares outstanding – 2010 – 118,732,935; 2009 – 118,681,184 Additional paid-in capital Treasury stock – at cost Retained earnings Accumulated other comprehensive income
79
79
1,938,525
1,932,814
(5,149)
(4,044)
3,925,243
3,169,123
879,971
540,197
Total stockholders’ equity
6,738,669
5,638,169
Total liabilities and stockholders’ equity
7,923,616
6,658,618
The accompanying notes are an integral part of these consolidated financial statements.
Financial Review
FR5
Financial Review
Synthes, Inc. and Subsidiaries
Consolidated Statements of Operations for the Years Ended December 31, 2010 and 2009
Net sales Cost of goods sold Gross profit
2010
2009
in 1,000 US$
in 1,000 US$
3,686,952
3,394,652
640,416
592,274
3,046,536
2,802,378
Operating expenses Selling and promotion
1,080,137
978,863
General and administrative
393,260
382,351
Research and development
172,365
168,345
Royalty expense
71,154
65,816
Amortization of intangible assets
46,262
44,272
1,763,178
1,639,647
1,283,358
1,162,731
Interest expense
(4,341)
(5,739)
Interest income
6,363
3,032
(13,400)
(6,124)
Operating income Other income (expenses)
Foreign exchange losses Other, net Earnings before income taxes
(16,810)
186
(28,188)
(8,645)
1,255,170
1,154,086
Income taxes
347,437
330,131
Net earnings
907,733
823,955
7.65
6.94
Basic and diluted earnings per share (expressed in US$)
in 1,000 of shares
in 1,000 of shares
Weighted-average number of common shares outstanding
118,678
118,677
Weighted-average number of common shares outstanding with dilutive effect
118,699
118,687
The accompanying notes are an integral part of these consolidated financial statements.
FR6
Financial Review
Synthes. Annual Report 2010
Synthes, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2010 and 2009
Accumulated other Additional Common stock in 1,000 Balance December 31, 2008
comprehensive
Total
Comprehen-
income Stockholders’
sive income
paid-in
Treasury
Retained
capital
stock
earnings
(loss)
equity
(loss) in 1,000 US$
of shares
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
118,718
79
1,930,002
(6,623)
2,461,762
440,600
4,825,820
854,334
Net earnings 2009
–
–
–
–
823,955
–
823,955
823,955
Re-issuance of treasury shares
–
–
98
2,579
–
–
2,677
–
–
–
–
–
(116,594)
–
(116,594)
–
–
–
2,714
–
–
–
2,714
–
–
–
–
–
–
7,278
7,278
7,278
–
–
–
–
–
1,238
1,238
1,238
–
–
–
–
–
91,081
91,081
91,081
118,718
79
1,932,814
(4,044)
3,169,123
540,197
5,638,169
923,552
–
–
–
–
907,733
–
907,733
907,733
59
–
–
–
–
–
–
–
Dividends CHF 1.1000 (US$ 0.9824) per share Share-based payment arrangements compensation Defined benefit pension plans, net of deferred taxes of US$ (1.616) million Reclassification adjustment for gains included in net earnings Foreign currency translation adjustment 2009 Balance December 31, 2009 Net earnings 2010 Issuance of common stock in connection with share-based compensationarrangements Purchases of treasury shares
–
–
–
(3,688)
–
–
(3,688)
–
Re-issuance of treasury shares
–
–
146
2,583
–
–
2,729
–
–
–
–
–
(151,613)
–
(151,613)
–
–
–
5,565
–
–
–
5,565
–
–
–
–
–
–
(26,244)
(26,244)
(26,244)
–
–
–
–
–
(4,325)
(4,325)
(4,325)
–
–
–
–
–
59
59
59
–
–
–
–
–
370,284
370,284
370,284
118,777
79
1,938,525
(5,149)
3,925,243
879,971
6,738,669
1,247,507
Dividends CHF 1.3500 (US$ 1.2776) per share Share-based payment arrangements compensation Defined benefit pension plans, net of deferred taxes of US$ 4.956 million Urealized loss on interest rate swap Urealized gain on investment securities Foreign currency translation adjustment 2010 Balance December 31, 2010
The accompanying notes are an integral part of these consolidated financial statements.
Financial Review
FR7
Financial Review
Synthes, Inc. and Subsidiaries
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009
2010
2009
in 1,000 US$
in 1,000 US$
907,733
823,955
Depreciation
256,739
220,329
Amortization
47,605
44,689
Cash flows from operating activities Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities
Share-based compensation Provisions for inventory obsolescence Provisions for doubtful accounts Deferred income tax benefit Losses on sale of property, plant and equipment Realized foreign exchange gains
8,148
5,293
44,963
45,458
5,556
3,925
(16,205)
(28,484)
9,413
3,096
(8,238)
(6,358)
Intangible asset impairment charge
9,000
-
Other
9,020
(5,964)
Accounts receivable - trade
(89,892)
(32,442)
Accounts receivable - other
(18,416)
(20,701)
Inventories
(20,202)
(90,840)
Prepaid expenses and other current assets
(14,384)
24,926
15,063
(7,307)
(25,275)
26,352
45,699
48,245
1,166,327
1,054,172
Changes in assets and liabilities, net of effects of business acquisitions
Accounts payable Income taxes payable Accrued expenses Net cash provided by operating activities
FR8
Financial Review
Synthes. Annual Report 2010
Cash flows from investing activities Capital expenditures for property, plant and equipment Consideration in connection with prior acquisitions Business acquisitions, net of cash acquired Proceeds from disposal of property, plant and equipment Proceeds of other instruments Investment in nonconsolidated investments and other long-term assets Disposals of nonconsolidated investments and other long-term assets Issuance of loans Proceeds from loans Purchases of available-for-sale securities Sales and maturities of available-for-sale securities Net cash used in investing activities
2010
2009
in 1,000 US$
in 1,000 US$
(345,463)
(299,637)
(48,020)
(108,555)
(189,715)
–
488
143
8,238
6,358
(7,283)
(6,088)
2,184
6,807
(1,023)
–
1,742
1,053
(3,279,683)
–
2,025,000
–
(1,833,535)
(399,919)
(777)
(1,646)
86,435
–
Cash flows from financing activities Principal payments of debt and capital lease obligations Proceeds from issuance of long-term debt Purchases of treasury shares
(3,688)
–
(151,613)
(116,594)
(69,643)
(118,240)
54,170
11,690
Net (decrease) increase in cash and cash equivalents
(682,681)
547,703
Cash and cash equivalents as of January 1
1,419,246
871,543
736,565
1,419,246
Dividends paid to stockholders Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents as of December 31 Supplemental disclosures of cash flow information Interest paid Income taxes paid
1,491
480
366,623
330,144
The accompanying notes are an integral part of these consolidated financial statements.
Financial Review
FR9
Financial Review. Note A/B
Synthes, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements December 31, 2010 and 2009 Note A: Basis of presentation 1
Description and nature of operations
Synthes, Inc. and its subsidiaries (the Group) develops, manufactures, and distributes products for the operative treatment of bone fractures including both metallic and osteobiological materials. Additionally, the Group has a power tools business including development, manufacturing, and distribution. The Group is comprised of Synthes, Inc. and the companies shown in Note C20 (list of fully consolidated companies as of December 31, 2010). Synthes, Inc. is a corporation registered in Delaware, USA.
FR10
Financial Review
Synthes. Annual Report 2010
Synthes, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements December 31, 2010 and 2009 Note B: Summary of significant accounting policies A summary of the Group’s significant accounting policies that were applied in the preparation of the accompanying consolidated financial statements follows: 1
Basis of the consolidated financial statements
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). All policies and procedures are consistent with these principles. The consolidated financial statements include the accounts of Synthes, Inc. and all companies in which Synthes, Inc. has directly or indirectly more than a 50% voting interest or is the primary beneficiary of a variable interest entity. For those consolidated subsidiaries where ownership is less than 100%, the outside stockholders’ interests are shown in noncontrolling interest in the accompanying consolidated financial statements. As of December 31, 2010 and 2009, the Group does not have a noncontrolling interest in a consolidated subsidiary. Subsidiaries are consolidated from the date of acquisition. Acquisitions of subsidiaries are accounted for using the purchase method of accounting. All intercompany transactions and balances between Group companies are eliminated. Pursuant to the Subsequent Events topic of the Financial Accounting Standards Board (FASB) Codification, the Group evaluated subsequent events after December 31, 2010 through February 16, 2011, representing the date that these consolidated financial statements were approved by the Group’s management and are available to be issued. The Group concluded that no material transactions occurred subsequent to December 31, 2010 that provided additional evidence about conditions that existed at December 31, 2010 or after that requires adjustment to the audited consolidated financial statements. 2
Foreign currency translation
The financial statements of the holding company’s subsidiaries outside the United States of America are translated into US dollars (US$), the Group’s reporting currency, as follows: The consolidated balance sheets are translated at year-end exchange rates. The consolidated statements of operations are translated at the weighted-average exchange rates for the period. Weighted-average exchange rates are calculated based on monthly average rates for the applicable currencies. Translation adjustments are charged or credited to accumulated other comprehensive income.
Financial Review
FR11
Financial Review. Note B
Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transaction. Gains and losses resulting from the settlement of such transactions and from the remeasurement of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statements of operations. The following is a summary of the Group’s major exchange rates used in relation to US$: WeightedYear-end rates
average rates for year
at December 31
ended December 31 2010
2009
CHF
1=
1.0661
0.9662
0.9604
0.9211
CDN
1=
1.0000
0.9493
0.9706
0.8775
GBP
1=
1.5441
1.6077
1.5450
1.5416
EUR
1=
1.3300
1.4366
1.3250
1.3907
BRL
1=
0.6025
0.5759
0.5689
0.5041
COP
100 =
0.0525
0.0488
0.0527
0.0465
AUD
1=
1.0168
0.8967
0.9187
0.7882
CNY
1=
0.1519
0.1471
0.1479
0.1464
INR
1=
0.0224
0.0215
0.0219
0.0207
JPY
100 =
1.2271
1.0820
1.1413
1.0691
3
Reclassifications
Certain 2009 financial information has been reclassified to conform to the current-year presentation. 4
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of three months or less. The Group places its cash and cash equivalents in financial institutions that are highly rated. Management believes it effectively safeguards cash assets given the current economic conditions. 5
Marketable securities
The Group’s marketable securities are available-for-sale securities recorded at fair value on the consolidated balance sheets, with the change in fair value during the period excluded from earnings and recorded net of tax as a component of accumulated other comprehensive income with any unrealized losses which are deemed to be other-than-temporary included in current period earnings, if applicable. Realized and unrealized gains and losses are determined based on the specific-identification method. At December 31, 2010 and 2009, the Group had no held-to-maturity or trading securities. During 2010, the Group purchased US$ 3.3 billion and had maturities of US$ 2.0 billion in U.S. Government securities. The securities are classified as short-term available-for-sale marketable securities on the consolidated balance sheets. The Group had no investments in marketable securities outstanding as of December 31, 2009.
FR12
Financial Review
2010
2009
Synthes. Annual Report 2010
6
Accounts receivable
The majority of the Group’s accounts receivable are due from various health care facilities. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. Payment terms vary. Accounts outstanding longer than the payment terms are considered past due. The Group determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, the customer’s current ability to pay its obligation, and the condition of the general economy and industry as a whole. The Group writes off accounts receivable when they are determined to be uncollectible. 7
Inventories
Inventories are stated at the lower of cost or market, using the first-in, first-out method. The Group maintains provisions for excess and obsolete inventory. The Group estimates these provisions based on historical experience and expected future trends. 8
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful life of the asset. The estimated useful lives are as follows: Land
–
Buildings
30 – 50 years
Building improvements
10 – 20 years
Machinery and fixtures
3 – 12 years
Equipment/EDP Loan sets and samples Vehicles
9
3 – 8 years 3 years 3 – 8 years
Impairment of long-lived assets
The Group periodically evaluates whether current facts or circumstances indicate that the carrying value of long-lived assets (other than goodwill and indefinitelived intangible assets) to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows to be produced by the long-lived asset is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on fair value using quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including discounted estimated future cash flows. 10 Intangible assets
Intangible assets with finite lives consist mainly of customer relationships, acquired patents and patent rights, software, product-related know-how, and licensing and marketing agreements and are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 40 years. Such assets are evaluated for impairment whenever impairment indicators exist.
Financial Review
FR13
Financial Review. Note B
Intangible assets with indefinite lives consist of the Synthes trade names, corporate trade names, and geographic marketing rights. Indefinite-lived assets are not amortized but are required to be tested for potential impairment at least annually, or whenever impairment indicators exist. Such assets are deemed to be impaired if book value exceeds estimated fair value. 11 Goodwill
The excess of cost over fair value of assets acquired in business combinations (goodwill) is assigned to specific reporting units and is tested for possible impairment at least annually, or whenever impairment indicators exist. Potential impairment is indicated when the carrying value of a reporting unit, including goodwill, exceeds its fair value. If potential for impairment exists, an impairment charge is recognized when the carrying value of a reporting unit’s goodwill exceeds its implied fair value. Goodwill is allocated among the Group’s four reportable segments that manufacture and sell similar products in different geographic areas. 12 Other assets
Other long-term assets are primarily nonconsolidated investments, loans and other deferred costs. Nonconsolidated investments are stated at cost, less any impairment adjustments. Loans are long-term loans to third parties which are carried at cost. 13 Contingencies
The Group records provisions for contingencies when it is judged probable that a liability has been incurred and the amount can be reasonably estimated. These provisions are adjusted periodically as assessments change or additional information becomes available. Product liabilities Product liability cases are routinely handled by in-house counsel and external counsel. Provisions are made for present product liability obligations resulting from past sales including related legal and other fees and expenses. The provision is actuarially determined taking into consideration such factors as past experience, amount and number of claims reported and estimates of claims incurred but not yet reported. Individually significant cases are provided for when probable and reasonably estimable. Management does not anticipate that any material losses not covered by the provision will be sustained by the Group as a result of these claims. Legal liabilities Provisions are made for anticipated settlement or judgment costs where a reasonable estimate can be made of the probable outcome of legal proceedings or claims against the Group. 14 Revenue recognition
Sales are recognized on products when the related goods have been shipped, title has passed to the customer, and there are no undelivered elements or uncertainties. For consignment inventory, revenue is recognized when the Group is notified that the product has been used.
FR14
Financial Review
Synthes. Annual Report 2010
Services revenue, which is insignificant, is recognized upon the completion of refurbishment of certain products and the shipment of that product back to the customer. Amounts billed to customers for shipping and handling of products are included in net sales. Costs incurred related to shipping and handling are included in cost of sales. The Group records estimated sales returns and allowances as a reduction of net sales in the same period revenue is recognized. 15 Income taxes
The Group accounts for income taxes using the liability method that requires determination of deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences are expected to reverse. Deferred income tax expense (benefit) is the result of changes in deferred tax assets and liabilities during the year. The Group recognizes interest and penalties related to unrecognized income tax positions in income tax expense. 16 Equity compensation
The Group has an equity incentive plan for directors and employees, which is a fixed employee stock-based compensation plan. Under this plan, the Group may grant options and shares for up to 1,500,000 shares of Common Stock. The exercise price of each option is equal to the market price of the Group’s stock on the date of grant. The maximum term of the options ranges from 8 to 14 years and the options vest over periods ranging from immediately to 5 years. Certain option and share awards provide for accelerated vesting if there is a change of control (as defined by the plan). During 2010, the equity incentive plan was renewed for 10 years, and each newly granted option has a life of 10 years rather than the previous 8 to 14 year range. The Group recognizes compensation cost for all share-based payments based on the grant-date fair value. 17 Financial instruments
In assessing the fair value of financial instruments, the Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance sheet date. The fair values of investments are based on quoted market prices at the balance sheet date. Other techniques, such as estimated discounted value of future cash flows, are used to determine fair value for the remaining financial instruments. The carrying value of financial instruments approximates fair value. 18 Concentrations of credit risk
Financial instruments that may potentially subject the Group to concentration of credit risk consist principally of cash, cash equivalents, marketable securities, trade accounts receivable, and derivatives. All cash, cash equivalents, marketable securities, and derivatives are placed in financial institutions with strong credit ratings, which minimizes the risk of loss due to nonpayment. Concentration of credit risks with respect to trade accounts receivable is limited, due to the large number of customers and their dispersion across many geographic areas. Also, the Group has policies in place to ensure that sales of products and services are
Financial Review
FR15
Financial Review. Note B
made to customers with an appropriate credit history. However, a significant portion of trade accounts receivable is with national health care systems in several countries. Although the Group does not currently foresee a credit risk associated with these receivables, repayment is dependent upon the financial stability of those customers. 19 Derivatives
The Group uses derivative financial instruments to manage interest rate risk and currency exchange risk. While these derivative financial instruments are subject to fluctuations in value, these fluctuations are generally offset by the value of the underlying exposures. The Group minimizes the risk of credit loss by entering into these agreements with major financial institutions that have high credit ratings. The Group recognizes all of its derivative instruments as either assets or liabilities in the consolidated balance sheets at fair value. The Group is exposed to foreign currency fluctuations relating to its operations throughout the world. The Group periodically enters into forward exchange contracts in order to minimize the impact of currency fluctuations on transactions and cash flows. These undesignated contracts are valued and recorded at their fair value on the accompanying consolidated balance sheets in other current assets and accrued liabilities. Changes in the fair value of these undesignated derivative contracts are recorded currently in the consolidated statements of operations in “foreign exchange (losses) gains” (Note C23). None of the foreign exchange contracts outstanding in 2010 and 2009 were designated as cash-flow hedges. The Group had an interest rate derivative with a notional value of CHF 120 million and a maturity of less than six years outstanding at December 31, 2010. This interest rate swap is designated as a cash flow hedge of the debt disclosed in Note C8, and is recorded at its fair value on the accompanying consolidated balance sheets in other current assets and accrued liabilities, while the related gains and losses are deferred in other comprehensive income in the equity section of the consolidated balance sheets. The group did not have any interest rate derivatives outstanding as of December 31, 2009. 20 Advertising costs
Advertising and promotion costs are expensed as incurred, and were US$ 37.1 million and US$ 39.4 million in 2010 and 2009, respectively. 21 Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates. Significant areas that require management’s estimates include the allowance for doubtful accounts receivable, provision for obsolete inventories, fair values of acquired assets and liabilities, useful lives of assets, product liability claims, commitments and contingencies, and income taxes. The Group is subject to risks and uncertainties, such as changes in the health care environment, regulatory oversight, changes in the financial markets, competition and legislation that may cause actual results to differ from estimated results.
FR16
Financial Review
Synthes. Annual Report 2010
22 New accounting standards
On January 1, 2010, the Group adopted the provisions of the Improvement to Financial Reporting by Enterprises Involved with Variable Interest Entities topic of the FASB Codification. The topic requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (VIE), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The adoption of these provisions did not have an impact on the Group’s consolidated financial statements. On January 1, 2010, the Group adopted the provisions of the Fair Value Measurements and Disclosures Topic Improving Disclosures About Fair Value Measurements of the FASB Codification. This topic requires companies to make new disclosures about recurring and nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements, and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The enhanced disclosures about recurring and nonrecurring fair value measurements are included in Note C23 to the Group’s consolidated financial statements. As disclosed in Note C23, effective January 1, 2008, the Group adopted the provisions of the Fair Value Measurements and Disclosures topic of the FASB Codification related to financial assets and financial liabilities. Additionally, in accordance with the provisions of this topic, the Group adopted the provisions for its fair value measurement of its nonfinancial assets and nonfinancial liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, on January 1, 2009. The adoption of these provisions did not have an impact on the Group’s consolidated financial statements, except as disclosed in Note C21 in relation to the acquisition of Anspach. In 2009, the Group adopted the provisions of the Subsequent Events topic of the FASB Codification. This topic establishes general standard of accounting for and disclosure of events that occur after the balance sheet date but before the date that the financial statements are issued or are available to be issued. This topic requires disclosure of the date through which an entity has evaluated subsequent events. The required disclosures are included in Note B1 to the consolidated financial statements. In 2008, the FASB issued new authoritative guidance regarding employer disclosures about postretirement benefit plan assets which now is included within the FASB Codification topic, Plan Accounting - Defined Benefit Pension Plans. This new guidance requires increased disclosures about an employer’s defined benefit pension or other postretirement plan assets. Specifically, the new guidance requires an entity to disclose information regarding its investment policies and strategies, its categories of plan assets, its fair value measurements of plan assets and any significant concentrations of risk in plan assets. The new authoritative guidance was effective for the Group in the year ended December 31, 2009, and the additional disclosures necessary to the consolidated financial statements are included in Note C10. In December 2007, the FASB issued new authoritative guidance regarding business combinations and noncontrolling interests in consolidated financial state-
Financial Review
FR17
Financial Review. Note B
ments which now is included within the FASB Codification topic, Business Combinations. The provisions of this guidance established new principles and requirements for accounting for business combinations, including recognition and measurement of identifiable assets acquired, goodwill acquired, liabilities assumed, and noncontrolling financial interests. Additionally, the provisions of this guidance require all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. These new provisions will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. The provisions of this guidance were required to be adopted simultaneously and were effective for fiscal years beginning on or after December 15, 2008. Earlier adoption was prohibited. Effective January 1, 2009, the Group adopted the new authoritative guidance regarding business combinations and noncontrolling interests in consolidated financial statements, as required, and the adoption of these provisions did not have a material effect on the Group’s consolidated financial statements. In March 2008, the FASB issued new authoritative guidance regarding disclosures about derivative instruments and hedging activities which now is included within the FASB Codification topic, Derivatives and Hedging. These new provisions require increased disclosures about an entity’s strategies and objectives for using derivative instruments; the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under the FASB Codification topic, Derivatives and Hedging; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Certain disclosures will also be required with respect to derivative features that are credit-risk related. The provisions of this guidance were effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The provisions of this guidance encourage, but do not require, comparative disclosures for earlier periods at initial adoption. Effective January 1, 2009, the Group adopted the new authoritative guidance regarding disclosures about derivative instruments and hedging activities, as required, and the adoption of these provisions did not have a material effect on the Group’s consolidated financial statements.
FR18
Financial Review
Synthes. Annual Report 2010
Synthes, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements December 31, 2010 and 2009 Note C: Footnotes 1
Marketable securities
Investments in marketable securities are summarized as follows at December 31, 2010: Cost Gross unrealized gain Gross unrealized loss in 1,000 US$
in 1,000 US$
in 1,000 US$
Fair value in 1,000 US$
Available-for-sale: U.S. Government obligations
1,254,624
63
(4)
1,254,683
Total
1,254,624
63
(4)
1,254,683
The net carrying value and estimated fair value of available-for-sale marketable securities at December 31, 2010, by contractual maturity, are as follows (in 1,000 US$): Due in 1 year or less
1,254,683
Due from 1 through 5 years
-
Due from 5 through 10 years
-
Due after 10 years
1,254,683
As of December 31, 2010, the gross unrealized losses of the Group’s availablefor-sale marketable securities was US$ 0.004 million and the fair value of the available-for-sale marketable securities with unrealized losses was US$ 234.9 million. The investments with unrealized losses have been in an unrealized loss position for less than twelve months, were caused by changes in interest rates and the unrealized losses recognized do not represent an other-than-temporary decline in value. For the twelve months ended December 31, 2010 and 2009, the cost of securities purchased, proceeds from sales and maturities and gross realized gains and losses on securities classified as available-for-sale were:
Cost of securities purchased Sales/maturities proceeds
2010
2009
in 1,000 US$
in 1,000 US$
(3,279,683)
-
2,025,000
-
Gross realized losses
-
-
Gross realized gains
-
-
Financial Review
FR19
Financial Review. Note C
2
Inventories
Inventories are summarized at December 31, as follows:
Raw materials
2010
2009
in 1,000 US$
in 1,000 US$
60,669
67,848
Work-in-progress and semi-finished products
128,992
118,071
Finished products
415,929
379,302
Customer consignment stock Gross value Less provision for obsolescence Net value
3
48,690
64,450
654,280
629,671
(133,413)
(104,172)
520,867
525,499
Property, plant and equipment
Details of property, plant and equipment at December 31, are as follows: 2010
2009
in 1,000 US$
in 1,000 US$
Land and buildings
278,902
270,628
Machines and fixtures
497,735
444,796
1,349,213
1,145,447
2,125,850
1,860,871
(1,430,942)
(1,222,725)
694,908
638,146
198,909
105,739
893,817
743,885
Office equipment, field equipment and vehicles
Less: accumulated depreciation
Construction in progress
Depreciation expense recorded in the consolidated statements of operations was US$ 256.7 million and US$ 220.3 million in 2010 and 2009, respectively. 4
Accounts receivable other
Following is a summary of accounts receivable other at December 31:
2010
2009
in 1,000 US$
in 1,000 US$
Refundable taxes, principally value-added tax (V.A.T.)
55,163
41,259
Receivable due from the AO Foundation
24,630
24,630
Deposits
2,679
4,480
Due from officers, directors and employees
3,918
2,549
12,904
4,596
99,294
77,514
All other
FR20
Financial Review
Synthes. Annual Report 2010
5
Intangible assets
Following is a summary of intangible assets, excluding goodwill, at the end of the year: December 31, 2010 Gross
Accumulated
Total
amount
amortization
in 1,000 US$
in 1,000 US$
in 1,000 US$
Finite-lived: Product intangible assets
47,447
96,400
(48,953)
Customer relationships
823,477
986,907
(163,430)
Patents/Patent rights
178,374
239,902
(61,528)
12,485
41,669
(29,184)
1,061,783
1,364,878
(303,095)
Geographic marketing rights
266,535
266,535
-
Trade names
791,004
791,004
-
Subtotal – indefinite-lived intangible assets
1,057,539
1,057,539
-
Total – intangible assets
2,119,322
2,422,417
(303,095)
Other intangible assets Subtotal – finite-lived intangible assets Indefinite-lived:
December 31, 2009 Gross
Accumulated
Total
amount
amortization
in 1,000 US$
in 1,000 US$
in 1,000 US$
Finite-lived: Product intangible assets
64,320
105,400
(41,080)
Customer relationships
716,256
843,259
(127,003)
Patents/Patent rights
171,270
215,712
(44,442)
15,901
40,067
(24,166)
967,747
1,204,438
(236,691)
Geographic marketing rights
241,550
241,550
–
Trade names
702,244
702,244
–
Subtotal – indefinite-lived intangible assets
943,794
943,794
–
1,911,541
2,148,232
(236,691)
Other intangible assets Subtotal – finite-lived intangible assets Indefinite-lived:
Total – intangible assets
As disclosed in Note C21, customer relationships, patents/patent rights and trade names intangible assets increased by US$ 100.4 million as a result of the Group’s acquisition of Anspach during 2010. The remaining increases in gross intangible assets from December 31, 2009 to December 31, 2010 result from changes in foreign currency translation rates. Additionally, during 2010, the Group made a decision to remove, from the U.S. market, a product related to the N Spine, Inc. acquisition. As part of that plan, an impairment loss of US$ 9.0 million was recognized, which is included in “Other, net” in the 2010 consolidated statement of operations, representing the excess of the aggregate carrying amount of certain intangible assets over the aggregate of their fair value. All of the impaired assets are part of the North America reportable segment.
Financial Review
FR21
Financial Review. Note C
Amortization expense for intangible assets, was US$ 47.6 million and US$ 44.7 million in 2010 and 2009, respectively. Estimated amortization expense for each of the five years through December 31, 2015 is as follows (in millions): US$ 46.2, US$ 45.8, US$ 44.0, US$ 41.5 and US$ 40.2, respectively. 6
Income taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities recognized in the consolidated balance sheets as of December 31, are as follows: Deferred income tax assets
2010
2009
in 1,000 US$
in 1,000 US$
Product liability
9,753
7,872
Net operating loss carryforwards
6,390
10,722
94,035
69,415
5,371
11,654
Inventories Accounts receivable Payments to employees Other Gross deferred income tax assets Valuation allowance Net deferred income tax assets
8,017
8,531
52,508
42,524
176,074
150,718
(6,178)
(8,299)
169,896
142,419
Deferred income tax liabilities Accelerated tax depreciation
(63,046)
(43,500)
(250,415)
(226,223)
(12,130)
(9,895)
(1,579)
(16,335)
Gross deferred income tax liabilities
(327,170)
(295,953)
Net deferred income tax liabilities
(157,274)
(153,534)
Intangible assets Inventories Other
At December 31, 2010, the approximate amounts and expiration of net operating loss carryforwards (primarily foreign) are as follows (in millions): 2011: US$ 0.2, 2012–2015: US$ 5.6, 2016 and later years: US$ 1.5, and US$ 13.7 have an indefinite carryforward period. The change in net deferred income tax liabilities is as follows:
Beginning of the year Statement of operations benefit Anspach purchase accounting Pension liability adjustment Currency translation adjustment End of the year
FR22
Financial Review
2010
2009
in 1,000 US$
in 1,000 US$
(153,534)
(179,231)
16,205
28,484
601
-
4,956
(1,564)
(25,502)
(1,223)
(157,274)
(153,534)
Synthes. Annual Report 2010
Deferred income tax assets and liabilities are included in the consolidated balance sheets as follows:
Current assets – deferred income taxes Noncurrent assets – deferred income taxes Current liabilities – deferred income taxes
2010
2009
in 1,000 US$
in 1,000 US$
53,269
42,428
123,972
103,877
(19,518)
(19,408)
Noncurrent liabilities – deferred income taxes
(314,997)
(280,431)
Total net deferred tax liabilities
(157,274)
(153,534)
Cumulative undistributed earnings of foreign subsidiaries, for which no U.S. income or foreign withholding taxes have been recorded, approximated US$ 1.154 billion at December 31, 2010. As the Group intends to permanently reinvest all such earnings, no provision has been made for income taxes that may become payable upon distribution of such earnings, and it is not practicable to determine the amount of the related unrecognized deferred income tax liability. While there are no specific plans to distribute the undistributed earnings in the immediate future, where economically appropriate to do so, such earnings may be remitted. Tax expense consists of: 2010
2009
in 1,000 US$
in 1,000 US$
Current taxes
363,642
358,615
Deferred tax benefit
(16,205)
(28,484)
347,437
330,131
The following reconciles the provision for income taxes, at the U.S. statutory federal income tax rate to the provision for income taxes as reported:
Earnings before income taxes Tax expense calculated at a statutory tax rate of 35% Effect of permanent items Effect of taxes in other countries State income taxes, net of federal income tax benefit Tax benefits relating to tax credits Change in unrecognized tax positions, net Income tax expense
2010
2009
in 1,000 US$
in 1,000 US$
1,255,169
1,154,086
439,309
403,930
(7,394)
(9,993)
(89,295)
(71,230)
18,180
19,016
(18,898)
(10,050)
5,535
(1,542)
347,437
330,131
The Group recognizes tax benefits only if it is more likely than not that the benefit will be sustained on examination by tax authorities based on technical merits of the tax position creating the benefit. The amount of gross unrecognized income tax benefits at December 31, 2009 is US$ 58.9 million, and the amount of accrued interest and penalties related to unresolved income tax positions is US$ 16.3 million, net of tax. The amount of net unrecognized income tax benefits at January 1, 2010, all of which would, if recognized, impact the Group’s effective tax rate, is US$ 45.5 million including accrued interest and penalties. At December 31, 2010, the amount of gross unrecognized
Financial Review
FR23
Financial Review. Note C
income tax benefits is US$ 64.8 million. The amount of net unrecognized income tax benefits, all of which would, if recognized, impact the Group’s effective tax rate is US$ 52.9 million including accrued interest and penalties. In 2010, the increase in expense for interest and penalties related to unresolved income tax positions amounted to US$ 3.2 million, net of tax. At December 31, 2010, accrued interest and penalties related to unresolved income tax positions were US$ 19.5 million, net of tax. The Group operates in various tax jurisdictions both inside and outside the United States. At December 31, 2010, tax authorities in several tax jurisdictions were conducting routine audits of the Group’s income tax returns filed in prior years. With a few exceptions, the Group is no longer subject to audits by tax authorities for tax years prior to 2007. Tax years subsequent to 2006 are open to examination in many of the tax jurisdictions in which the Group operates. Following is a reconciliation of beginning and ending amounts of gross unrecognized income tax positions for fiscal years 2010 and 2009:
Beginning Balance January 1st
2010
2009
in 1,000 US$
in 1,000 US$
58,929
64,036
Increase from current-year tax positions
4,365
4,906
Increase from prior years’ tax positions
3,506
2,742
Decrease from prior years’ tax positions
(2,964)
(7,748)
Decrease from settlements with taxing authorities
(791)
(2,219)
Decrease from lapse of statute of limitations
(120)
(4,434)
Currency translation adjustment
1,853
1,646
64,778
58,929
Ending Balance December 31st
It is expected that the amount of tax liability for unrecognized income tax positions will change in the next twelve months; however, these changes are not expected to have a significant impact on the Group’s consolidated statements of operations or financial position. 7
Goodwill
Changes in the carrying amount of goodwill during 2010 and 2009, by reporting unit and in the aggregate, are summarized in the following tables:
2010 Balance, January 1, 2010 Arising in business acquisitions Currency translation adjustments Other Balance, December 31, 2010
Total
North America
Europe
Asia Pacific
Latin America
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
1,138,238
72,962
938,654
77,006
49,616
52,376
51,063
827
–
486
102,143
–
89,335
7,965
4,843
325
–
–
–
325
1,293,082
124,025
1,028,816
84,971
55,270
Total
North America
Europe
Asia Pacific
Latin America
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
1,123,716
81,642
918,494
75,319
48,261
Currency translation adjustments
22,962
–
20,160
1,687
1,115
Other
(8,440)
(8,680)
–
–
240
1,138,238
72,962
938,654
77,006
49,616
2009 Balance, January 1, 2009
Balance, December 31, 2009
FR24
Financial Review
Synthes. Annual Report 2010
8
Long-term debt
In January 2010, the Group entered a CHF 120 million credit facility with three Swiss banks. Borrowings under the credit facility bear interest at a floating rate and the principal balances at December 31, 2010 total CHF 90.0 million (US$ 96.0 million). The credit facility is hedged by an interest rate swap to fix the rate on the CHF 120 million of planned borrowings to maturity in December 2016. The borrowing is secured by a new European headquarters building in Solothurn, Switzerland and is intended to fund the construction of the same. Interest expense associated with the credit facility of CHF 0.4 million (US$ 0.4 million) has been capitalized as of December 31, 2010. Details of long-term debt as of December 31, are as follows:
Secured loans Unsecured loans Other, including capital lease obligations
Less: current maturities
2010
2009
in 1,000 US$
in 1,000 US$
95,953
-
-
57
2,465
3,186
98,418
3,243
(121)
(527)
98,297
2,716
Required principal payments for the next five years and thereafter are as follows: Year ended December 31
in 1,000 US$
2011
121
2012
121
2013
152
2014
170
2015
191
Thereafter
9
97,663
Leases
Leased assets included in property, plant and equipment, where the Group is a lessee under a capital lease, are comprised of a single building, office equipment and vehicles as of December 31, 2010 and 2009. Following is a summary of property held under capital leases as of December 31:
Cost Accumulated depreciation Net book amount
2010
2009
in 1,000 US$
in 1,000 US$
6,428
6,139
(4,668)
(4,151)
1,760
1,988
The Group leases office buildings from a related party. One of the leases is classified as a capital lease with the related asset and liability recorded. The lease provides for minimum annual lease payments, in the aggregate, of US$ 4.4 million through 2021, plus contingent annual rentals based on the change in the U.S. Consumer Price Index.
Financial Review
FR25
Financial Review. Note C
Minimum future lease payments under capital leases as of December 31, 2010 for each of the next five years and in the aggregate are:
Amount Year ended December 31
in 1,000 US$
2011
399
2012
399
2013
399
2014
399
2015
399
Thereafter
2,360
Total minimum lease payments
4,355
Less: amount representing interest
(1,878)
Present value of minimum lease payments
2,477
Operating leases consist primarily of rental agreements for real estate, aircraft, machinery and office equipment expiring in various years through 2021, generally with options to renew. Payments made under operating leases are charged to the consolidated statement of operations on a straight-line basis over the period of the lease. The future minimum rental payments as of December 31, 2010 under noncancelable operating leases having initial or remaining terms in excess of one year are: Amount Year ended December 31
in 1,000 US$
2011
15,275
2012
11,650
2013
7,358
2014
4,952
2015
3,417
Thereafter
623
Total minimum future rental payments
Operating lease expense for the years ended December 31, 2010 and 2009 was US$ 24.3 million and US$ 19.8 million, respectively. 10 Pensions and other postretirement benefits
Upon retirement, employees of certain non-U.S. subsidiaries are entitled to pensions according to the laws and practices of the individual countries where the employees are located. Certain non-U.S. subsidiaries have defined benefit pension plans. The major defined benefit pension plans provide pensions as well as life and disability insurance mainly for subsidiaries in Switzerland.
FR26
Financial Review
43,275
Synthes. Annual Report 2010
Following are reconciliations of the pension benefit obligation and plan assets for 2010 and 2009. 2010
2009
in 1,000 US$
in 1,000 US$
Pension benefit obligation (322,037)
(274,583)
Service cost
Balance, beginning of year
(28,728)
(24,569)
Interest cost
(10,400)
(9,390)
Benefits paid Actuarial losses Changes in foreign currency exchange rates
8,553
4,284
(18,833)
(9,655)
(38,309)
(8,124)
(409,754)
(322,037)
Fair value, beginning of year
310,860
250,598
Actual return on plan assets
3,219
27,997
19,474
16,823 11,461
Balance, end of year Plan assets
Company contributions Contributions by plan participants
12,678
Changes in foreign currency exchange rates
34,576
8,265
Benefits paid to plan participants
(8,553)
(4,284)
Fair value, end of year
372,254
310,860
Funded status
(37,500)
(11,177)
For 2010 and 2009, the amounts recognized in the consolidated balance sheets were classified as follows:
Other assets – noncurrent
2010
2009
in 1,000 US$
in 1,000 US$
22,846
16,686
Employee benefits and pension liabilities – noncurrent
(60,346)
(27,863)
Accrued pension liability, net – noncurrent
(37,500)
(11,177)
Accumulated other comprehensive income
47,819
21,575
The underfunded status of the plans of US$ 37.500 million and US$ 11.177 million at December 31, 2010 and 2009, respectively, is recognized in the accompanying consolidated balance sheets in other long-term liabilities. No plan assets are expected to be returned to the Group during the fiscal year ending December 31, 2011. The accumulated benefit obligation was US$ 384.1 million and US$ 305.0 million at December 31, 2010 and 2009, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for plans with accumulated and projected benefit obligations in excess of plan assets were US$ 406.1 million, US$ 381.0 million and US$ 368.7 million, respectively, as of December 31, 2010. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for plans with projected benefit obligations in excess of plan assets were US$ 5.4 million, US$ 3.5 million and US$ 2.7 million, respectively, as of December 31, 2009.
Financial Review
FR27
Financial Review. Note C
The amounts recognized in the consolidated statements of operations, for the years ended December 31, are as follows: 2010
2009
in 1,000 US$
in 1,000 US$
Service cost
28,728
24,569
Interest cost
10,400
9,390
(11,615)
(9,445)
Expected return on plan assets Net actuarial losses recognized during the year Employee contributions Settlement or curtailment loss
122
834
(12,678)
(11,461)
207
-
15,164
13,887
2010
2009
in %
in %
Discount rate
2.64
3.24
Expected return on plan assets
3.58
3.73
Future salary increases
2.02
2.03
Future pension increases
0.25
0.25
Target allocation
Percentage of plan assets at
2011
December 31, 2010
Total pension expense, included in personnel costs
The pension plan assets include corporate bonds and equity securities of Swiss and international companies, real estate and cash with a total fair value of US$ 372.3 million at December 31, 2010. The Swiss pension fund complies with the provisions of the Swiss Pension Fund Act (BVG; Bundesgesetz über die berufliche Vorsorge). The last actuarial valuation was completed December 31, 2010. Principal actuarial assumptions (expressed as weighted averages):
The Group’s defined benefit pension funds’ investment managers propose the expected long-term rate-of-return on assets assumption for each asset category, and the Group’s management then reviews and confirms the proposal. The expected long-term rate-of-return on assets for the Group’s major defined benefit pension fund in Switzerland is as follows: domestic equities at 6.50%, foreign equities at 5.50%, domestic bonds at 3.00%, foreign bonds at 3.50% and real estate at 4.00%. This results in a weighted expected long-term rate-of-return on assets assumption of 3.60% for the Group. The pension plan asset allocation at December 31, 2010 and the target asset allocation for 2011 are as follows:
Asset category
in %
in %
Equity securities
25.37
25.22
Debt securities
59.74
59.86
Real estate
11.87
11.90
Other
3.02
3.02
Total
100.00
100.00
FR28
Financial Review
Synthes. Annual Report 2010
The maturities of debt securities at December 31, 2010, range from 1 to approximately 50 years with a weighted-average maturity of 2.5 years. Pension contributions
in 1,000 US$
2011 (expected)
21,556
Of the US$ 21.6 million in cash expected to be contributed to the defined benefit pension plans during 2011, US$ 21.6 million is estimated to be needed to satisfy minimum funding requirements, and no additional contribution is expected to be contributed at the Group’s discretion. At December 31, 2010, the following benefit payments, which reflect expected future service, are expected to be paid from the defined benefit pension plans: Year ending December 31
in 1,000 US$
2011
11,204
2012
7,556
2013
9,625
2014
10,460
2015
11,726
2016–2020
86,146
The Group’s foundation board for the major defined benefit pension fund in Switzerland has a defined target investment strategy. Additionally, four different investment managers manage a portion of the assets according to the target investment strategy, and there is a monthly review of each asset category’s performance.
Financial Review
FR29
Financial Review. Note C
The fair value of each major category of plan assets, according to the level within the fair value hierarchy in which the fair value measurements fall in their entirety, as of December 31, 2010 and 2009 is as follows: FY 2010
Quoted Prices in Active Markets for
Significant Other
Significant
Identical Assets
Observable Inputs
Unobservable Inputs
Total Fair Value of Asset Category Cash and cash equivalents (a)
Plan Assets
(Level 1)
(Level 2)
(Level 3)
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
5,969
5,969
–
–
Equity securities (b)
134,377
134,377
–
–
Corporate bonds (c)
225,644
225,606
38
–
6,264
4,851
1,413
–
372,254
370,803
1,451
–
Other (d) Total FY 2009
Quoted Prices in Active Markets for
Significant Other
Significant
Identical Assets
Observable Inputs
Unobservable Inputs
Total Fair Value of Asset Category Cash and cash equivalents (a)
Plan Assets
(Level 1)
(Level 2)
(Level 3)
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
23,565
23,565
–
–
Equity securities (b)
119,930
119,930
–
–
Corporate bonds (c)
161,207
161,207
–
–
6,158
4,978
1,180
–
310,860
309,680
1,180
–
Other (d) Total
As of December 31, 2010 and 2009, there were no fair value measurements using significant unobservable (Level 3) inputs for any of the Group’s pension plan assets. The Group’s fair value hierarchy input levels are defined in Note C23. (a) Cash
and cash equivalents: Consists primarily of Swiss Francs and Euros plus various other foreign currencies. See Note B4 for a definition of cash and cash equivalents.
(b) Equity
securities: Predominantly includes investments in Swiss companies and indirect investments (i.e., exchange-traded funds, investment funds) replicating the Swiss Performance Index (SPI), indirect investments in diversified portfolios replicating the Morgan Stanley Capital International (MSCI) Developed Markets World ex Switzerland (companies in developed countries outside Switzerland) and MSCI Emerging Markets Free (emerging markets outside of Switzerland and the U.S.), and investments in real estate through listed institutional investment funds / investment vehicles according to the Swiss laws for pension schemes.
(c)
Corporate bonds: Corporate bonds consist primarily of fixed income securities issued by U.S., Swiss and other foreign corporations or governments. These assets are rated “A” or higher by Standard & Poor’s and “A2” or higher by Moody’s or a comparable rating agency. These assets are valued at market prices (mark-to-market).
(d) Other:
This category consists of several miscellaneous assets such as cash surrender value of insurance contracts and other equity securities and corporate bonds. The majority of these investments have directly observable values and are classified as Level 1 investments, while the others have valuations that are based on observable inputs and are classified as Level 2 investments.
Synthes defined contribution plans
The Group has defined contribution retirement plans, which cover substantially all North American employees. The expense recorded in the consolidated statements of operations for the years ended December 31, 2010 and 2009 was US$ 24.4 million and US$ 18.8 million, respectively. FR30
Financial Review
Synthes. Annual Report 2010
11 Commitments and contingencies
The Group must observe the laws, government orders and regulations of the countries in which it operates. Synthes, Inc. and certain subsidiaries are currently involved in legal and administrative proceedings arising out of the normal conduct of their business. The Group is, and will likely continue to be, subject to various lawsuits and claims that arise from time to time in the ordinary course of business, including those involving product liability, intellectual property, commercial, employment, real estate, environmental and antitrust matters. Legal proceedings of this nature are inherently unpredictable and substantial losses sometimes result. As a consequence, the Group may in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its financial position, results of operations or cash flows. Management does not anticipate that any currently pending legal proceedings of this nature will result in any material losses not covered by provisions therefor. Governments and regulatory authorities have been stepping up their compliance and law enforcement activities in recent years in key areas, including food and drug regulation, sales and marketing practices, corruption, environmental and antitrust matters. The Group’s businesses have been subject, from time to time, to such governmental investigations and information requests and audits by regulatory authorities. Government investigations are inherently unpredictable and substantial losses sometimes result. As previously disclosed, on June 16, 2009, the United States Attorney’s Office for the Eastern District of Pennsylvania filed an indictment against Synthes, Inc. (the parent company of the Group), its subsidiary, Norian Corporation (“Norian”), and four individuals who were executives of the Group during the period in question, charging them with violations of the U.S. Food, Drug and Cosmetic Act (the “Act”) in connection with certain test marketing and promotional practices involving Norian products during the period May 2002 to July 2004. The indictment followed an investigation by the government that was first disclosed to the Group when it received a grand jury subpoena in March 2006. In October 2010, Synthes, Inc. and Norian announced that they had entered into agreements (“Agreements”) with the U.S. Department of Justice and the Office of Inspector General of the Department of Health and Human Services (“OIG”) to resolve the investigation, subject to court approval. Under the Agreements, the parent company of the Group agreed to pay $808,000 in settlement, fines and forfeiture payments for a single misdemeanor violation of the U.S. Food, Drug and Cosmetic Act (the “Act”), and also agreed to divest the assets of Norian. Norian agreed to pay fines and forfeitures of approximately $23.5 million for one felony and numerous misdemeanor violations of the Act. In addition, Synthes, Inc. entered into a Corporate Integrity Agreement (“CIA”) with the OIG. Under that agreement, which is to remain in effect for five years, Synthes, Inc. will build upon its existing corporate compliance program, which was established in 2005, and retain an Independent Review Organization to help the company monitor and evaluate compliance in its promotional and product-related business functions. On November 30, 2010, the United States District Court for the Eastern District of Pennsylvania accepted the pleas by the parent company of the Group and Norian referenced in the Agreements, and the
Financial Review
FR31
Financial Review. Note C
Agreements became effective. All amounts due under the Agreements have been paid, and the payments did not have a material effect on the financial performance or financial position of the Group. The Group is in the process of divesting the assets of Norian. Each of the four former executives has entered a guilty plea to a single misdemeanor violation of the Act under the responsible corporate officer doctrine, and they are awaiting sentencing. Under the CIA, the Group is obligated to notify the OIG of probable violations of relevant laws and regulations (“Reportable Events”). Management does not believe any Reportable Event reported to the OIG to date is expected to have a material adverse effect upon the Group. The book value of pledged assets, which includes property, plant, equipment and receivables, at December 31, 2010 and 2009 was US$ 95.5 million and US$ 0.6 million, respectively. The aggregate fair value of all outstanding third-party guarantees included in the consolidated balance sheets at December 31, 2010 and 2009 was US$ 0.5 million and US$ 0.6 million, respectively. Capital expenditures for property, plant and equipment contracted for but not recognized in the consolidated financial statements are US$ 6.2 million and US$ 2.4 million at December 31, 2010 and 2009, respectively. 12 Share capital
Synthes, Inc. has 150,000,000 shares of Common Stock authorized with a par value of CHF 0.001 and a stated value of CHF 0.50. At December 31, 2010 and 2009, 118,777,075 and 118,717,913 shares were issued and fully paid, respectively. Additionally, 150,000 shares of Series A junior participating Preferred Stock with a par value of CHF 0.01 and a stated value of CHF 5.00 have been authorized. None have been issued. Preferred Stock is authorized only for issuance upon exercise of rights issued pursuant to the Synthes Shareholders’ Rights plan. The rights under the plan become exercisable in certain circumstances where a person or persons acquires or agrees to acquire beneficial ownership of 33 1/3% or more of the Group’s Common Stock. The rights provide shareholders (except the person or persons that acquired greater than 33 1/3%) the right to buy a fractional share of Preferred Stock that approximates the value of a share of Common Stock for half-price, thereby substantially diluting the value of the Group’s existing Common Stock. The holders of Synthes, Inc. Common Stock are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the General Meeting of Shareholders. The stock is listed on the Swiss Stock Exchange (SIX Swiss Exchange). Equity incentive plan
Under the equity incentive plan, each Common Stock option gives its holder the right to purchase one share of Synthes, Inc. Common Stock. The options vest over periods ranging from immediately to five years and expire after eight to fourteen years. Additionally, under the equity incentive plan, 59,162 restricted shares were awarded to officers of the Group during 2010 with a weighted-average grant
FR32
Financial Review
Synthes. Annual Report 2010
date fair value of CHF 123.6 (US$ 131.77) per share. None of these instruments vested and all were outstanding at December 31, 2010. Restricted shares are typically awarded under the incentive plan with vesting requirements similar to those of stock options. The weighted-average exercise price is listed in CHF since it is payable in CHF and Synthes, Inc. shares are traded on the SIX Swiss Exchange. Following is a summary of the status of the fixed employee stock-based compensation plan during 2010 and 2009:
Weighted-
Weighted
average
average
-
exercise price
remaining
Aggregate
Number of
per share
contractual term
intrinsic value
option shares
(CHF)
(years)
(in 1,000 CHF)
Outstanding at December 31, 2009
375,000
127.3
8.2
3,020
Granted
315,000
132.0
-
-
Forefited / canceled
(22,500)
132.4
-
-
Outstanding at December 31, 2010
667,500
129.3
8.1
(2,010)
Vested and exercisable at December 31, 2010
200,000
132.1
6.5
(1,165)
Nonvested at December 31, 2010
467,500
128.1
8.7
(845)
Vested & expected to vest at December 31, 2010
667,500
129.3
8.1
(2,010)
Weighted-
Weighted-
average
average
exercise price
remaining
Aggregate
per share
contractual term
intrinsic value
option shares
(CHF)
(years)
(in 1,000 CHF)
250,000
138.1
8.5
(1,180)
Number of Outstanding at December 31, 2008 Granted
125,000
105.5
–
–
Outstanding at December 31, 2009
375,000
127.3
8.2
3,020
Vested and exercisable at December 31, 2009
127,500
133.5
6.6
235
Nonvested at December 31, 2009
247,500
124.1
9.0
2,786
The weighted-average fair value of options granted in 2010 and 2009, estimated on the date of grant using the Black-Scholes option pricing model was US$ 40.22 and US$ 32.77, respectively, using the following assumptions: Assumption
2010
2009
Dividend yield
1.02%
1.04%
Risk-free interest rate
3.09%
3.19%
7.0
7.0
23.76%
24.47%
Expected life of options (years) Expected volatility
The total intrinsic value of options exercised during the years ended December 31, 2010 and 2009 was zero. The total share-based compensation cost associated with stock options and restricted share awards, that has been recognized in results of operations, was US$ 5.565 million and US$ 2.714 million for fiscal 2010 and 2009, respectively. The total income tax benefit recognized in results of operations for share-based
Financial Review
FR33
Financial Review. Note C
compensation arrangements was US$ 1.542 million and US$ 0.839 million for fiscal 2010 and 2009, respectively. As of December 31, 2010, there was US$ 21.480 million (pretax) / US$ 15.530 million (net of tax) of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a period of 4.9 years. Treasury shares
Synthes, Inc. directly owned 44,140 shares and 36,729 shares of its own stock at December 31, 2010 and 2009, respectively. During 2010, 30,000 shares were repurchased and 22,589 shares were distributed. Zero shares were repurchased and 23,421 shares were distributed during 2009. Treasury shares are recorded at cost. 13 Segment reporting
The Group’s operations are classified into four reportable segments that manufacture and sell similar products in different geographic areas. The North America, Europe, Asia Pacific and Latin America reportable segments derive their revenues from the sale of medical implants. The key determining factor in identifying the reportable segments is how the Group’s Chief Executive Officer routinely reviews the Group’s results. Intersegment revenues are sales made between Group companies, and are based upon transfer prices. The “Eliminations” column consists primarily of intercompany eliminations between the reportable segments. Generally, the Group evaluates performance on the basis of revenues, operating profit and net profit. The accounting policies applied by each of the segments are the same as those described in the summary of significant accounting policies (Note B). Reportable segments (in 1,000 US$) For the year
North
ended December 31, 2010 External revenue Intersegment revenue Interest income
Asia
Latin
Elimi-
America
Europe
Pacific
America
nations
Consolidated totals
2,157,909
929,450
423,095
176,498
–
3,686,952
135,739
560,126
–
–
(695,865)
–
1,561
4,331
224
247
–
6,363
613
3,235
64
385
44
4,341
173,190
129,254
50,521
11,246
(59,867)
304,344
Segment operating income (loss)
865,441
419,990
(23,345)
18,819
2,453
1,283,358
Income tax expense (benefit)
298,217
42,132
465
6,836
(213)
347,437
Interest expense Depreciation and amortization
Segment net earnings (loss) Segment total assets Expenditures for long-lived assets
FR34
Financial Review
562,762
357,363
(19,223)
7,362
(531)
907,733
3,002,203
4,301,883
672,228
179,772
(232,470)
7,923,616
331,914
147,199
65,903
13,116
(53,206)
504,926
Synthes. Annual Report 2010
Reportable segments (in 1,000 US$) For the year ended December 31, 2009 External revenue Intersegment revenue
Asia
Latin
Elimi-
America
North Europe
Pacific
America
nations
totals
2,059,131
838,829
356,960
139,732
–
3,394,652
114,355
539,999
–
68
(654,422)
–
971
1,546
275
240
–
3,032
Interest income
682
4,735
57
265
–
5,739
156,523
119,884
34,220
9,089
(54,698)
265,018 1,162,731
Interest expense Depreciation and amortization
Consolidated
Segment operating income (loss)
787,130
393,845
(3,872)
8,435
(22,807)
Income tax expense (benefit)
272,569
51,137
4,134
5,555
(3,264)
330,131
Segment net earnings (loss)
516,275
328,538
(5,471)
7,334
(22,721)
823,955
2,475,168
3,627,175
574,051
191,140
(208,916)
6,658,618
194,985
123,550
50,583
12,148
(75,541)
305,725
Segment total assets Expenditures for long-lived assets
Geographic information
Revenues, which are based on the location of the customer, and property, plant and equipment, net in the United States and other countries, for the years ended December 31, 2010 and 2009, respectively, are as follows: 2010
2009
in 1,000 US$
in 1,000 US$ 2,000,866
Revenues United States
2,083,897
Rest of the world
1,603,055
1,393,786
Totals
3,686,952
3,394,652
United States
358,437
314,515
Switzerland
347,357
272,135
Rest of the world
188,023
157,235
Totals
893,817
743,885
Property, plant and equipment, net
14 Personnel expenses
Personnel expenses were as follows: For the year ended December 31 2010
2009
in 1,000 US$
in 1,000 US$
1,035,777
959,560
100,023
114,197
Pension costs – defined benefit plans
15,164
13,887
Pension costs – defined contribution plans
24,380
18,776
Other, including training and education
78,700
67,572
1,254,044
1,173,992
Wages and salaries Social Security costs
15 Research and development expense
Research and development costs are charged to operations when incurred and are included in operating expenses. For the years ended December 31, 2010 and 2009, the costs amounted to US$ 172.4 million and US$ 168.3 million, respectively, and consist of the cost of personnel, material, depreciation and related overhead cost.
Financial Review
FR35
Financial Review. Note C
They are 4.67% and 4.96% of sales for the years ended December 31, 2010 and 2009, respectively. 16 Earnings per share (EPS)
The following is a calculation of basic and diluted earnings per share for the years ended December 31, 2010 and 2009. For the diluted earnings per share, the weighted-average shares are adjusted to assume conversion of all potentially dilutive stock options. For the year ended December 31 2010
2009
in 1,000 US$
in 1,000 US$
907,733
823,955
in 1,000 of shares
in 1,000 of shares
118,678
118,677
21
10
118,699
118,687
Basic EPS of common stock (expressed in US$)
7.65
6.94
Diluted EPS of common stock (expressed in US$)
7.65
6.94
Net earnings
Weighted-average number of common shares used in basic EPS Effect of dilutive equity incentive plan stock options Weighted-average number of common shares and dilutive potential common shares used in diluted EPS
The dilutive effect of stock options in the aggregate of 477,500 and 200,000 shares were not included in the computation of diluted earnings per share for the years ended December 31, 2010 and 2009, respectively, as their effect would be anti-dilutive. 17 Total personnel
The number of personnel employed by the Group at December 31, 2010 and 2009 was 11,426 and 10,705, respectively. The average number of personnel employed during the period was 11,066 and 10,326, for the years ended December 31, 2010 and 2009, respectively. 18 Related party transactions
The Group has entered into transactions in the normal course of business with related parties, including companies controlled by or affiliated with a major shareholder of the Group. Transactions in 2010 and 2009 between the Group and related parties are summarized below: 1. The Group leases buildings and certain other assets from various related parties, which are classified as both operating and capital leases. The operating leases provide for minimum aggregate rentals of US$ 4.2 million through November 2021, plus contingent annual rental adjustments based on the United States Consumer Price Index. The capital lease, where the related assets and liabilities have been recorded, provides for minimum aggregate lease payments of US$ 4.4 million through November 2021, plus contingent annual rental adjustments also based on the United States Consumer Price Index. 2. The Group has a non-interest-bearing loan receivable from a related party for approximately US$ 1.0 million and US$ 2.7 million at December 31, 2010 and 2009, respectively. This loan is secured by an assignment of the cash surrender value or the proceeds of insurance policies of the related party.
FR36
Financial Review
Synthes. Annual Report 2010
3. Following is a summary of transactions and balances with the Group’s related parties for 2010 and 2009:
Lease payments to related parties Due from related parties (included in the accompanying consolidated balance sheets) Purchases from related parties
2010
2009
in 1,000 US$
in 1,000 US$
2,973
2,990
17
11
–
–
Contributions to defined contribution plans for officers and directors
Contributions to defined contribution plans for officers and directors were US$ 0.055 million in both 2010 and 2009. Equity compensation benefits to officers and directors
The aggregate number of shares issued to the officers and directors of the Group during 2010 and 2009 were 81,751 shares, including 59,162 restricted shares as disclosed in Note C12, and 23,421 shares, respectively. In 2010 and 2009, charges to operations related to the issuance of these shares were US$ 3.1 million and US$ 2.7 million, respectively. The outstanding number of share options issued to the officers and directors of the Group was 355,000 options and 325,000 options at the end of 2010 and 2009, respectively. Officers’ and directors’ remuneration
In 2010 and 2009, the total remuneration of the officers and directors was US$ 20.4 million and US$ 17.6 million, respectively. 19 Comprehensive income
Comprehensive income is the total of net income plus all other changes in net assets arising from nonowner sources, which are referred to as “other comprehensive income.” Changes in the components of other comprehensive income and in accumulated other comprehensive income for 2010 and 2009 are as follows: Unrealized Foreign currency Defined benefit pentranslation
Unrealized gains
Accumulated
gains
other
sion plans, (losses) on financial on investment
comprehensive
adjustment
net of taxes
derivatives
securities
income
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
470,691
(28,853)
(1,238)
–
440,600
91,081
7,278
1,238
–
99,597
Balance at December 31, 2009
561,772
(21,575)
–
–
540,197
Change during 2010
370,284
(26,244)
(4,325)
59
339,774
Balance at December 31, 2010
932,056
(47,819)
(4,325)
59
879,971
Balance at December 31, 2008 Change during 2009
Financial Review
FR37
Financial Review. Note C
20 Fully consolidated companies
The following is a list of fully consolidated companies, all of which are unlisted, as of December 31, 2010: Nominal share Name, domicile
Country
Percentage held
capital in 1,000
Synthes Argentina S.A., Buenos Aires
Argentina
100
ARS
Synthes Australia Pty., Ltd., North Ryde
Australia
100
AUD
9,900 10
Synthes Oesterreich GmbH, Salzburg
Austria
100
EUR
2,000
Synthes S.A., Brussels
Belgium
100
EUR
250
Synthes Industria e Comercio Ltda., Rio Claro
Brazil
100
BRL
15,602
Synthes Canada, Ltd., Mississauga, Ontario
Canada
100
CDN
50
Synthes Chile SpA, Santiago
Chile
100
CLP
10,000
Synthes Colombia S.A., Bogota
Colombia
100
COP
594,000
Synthes Costa Rica SCR, Ltda., San Jose
Costa Rica
100
CRC
103,204
Synthes. s.r.o., Praha
Czech Republic
100
CZK
95,100
Synthes A/S, Herlev
Denmark
100
DKK
502
Synthes Oy, Helsinki
Finland
100
EUR
34
Synthes, Etupes Cedex
France
100
EUR
9,131
Spine Solutions GmbH, Tuttlingen
Germany
100
EUR
25
Synthes Deutschland Holding GmbH, Umkirch
Germany
100
EUR
1,023
Synthes GmbH, Umkirch
Germany
100
EUR
250
Synthes Medical Immobilien GmbH, Umkirch
Germany
100
EUR
900
Synthes Tuttlingen GmbH, Tuttlingen
Germany
100
EUR
103
Innomedic GmbH, Philippsburg-Rheinsheim
Germany
100
EUR
220
Synthes (Hong Kong) Ltd., Hong Kong
Hong Kong
100
HKD
5,000
Synthes Hong Kong Holdings Ltd., Hong Kong
Hong Kong
100
HKD
46,800
Synthes Medical Kft., Budapest
Hungary
100
HUF
50,000
Synthes Medical Ireland Ltd., Dublin
Ireland
100
EUR
1
Synthes Medical Pvt. Ltd., New Delhi
India
100
INR
247,650
Synthes S.r.l., Mailand
Italy
100
EUR
1,600
Synthes K.K., Tokyo
Japan
100
JPY
95,000
Synthes Korea Ltd., Seoul
Korea
100
KRW
Synthes Luxembourg S.a.r.l., Luxembourg
Luxembourg
100
USD
8,050,000 262,073
Synthes Lux Finance S.a.r.l., Luxembourg
Luxembourg
100
CHF
286,019 3,650,089
Synthes Lux Holding S.a.r.l., Luxembourg
Luxembourg
100
CHF
Synthes Malaysia Sdn Bhd., Selangor
Malaysia
100
MYR
200
Synthes S.M.P., S.A. de C.V., Mexico City
Mexico
100
MXP
199,018
Synthes B.V., Zeist
Netherlands
100
EUR
18
Synthes New Zealand Ltd., Auckland
New Zealand
100
NZD
53
Synthes AS, Oslo
Norway
100
NOK
200
Synthes (Shanghai) Medical Trading Co. Ltd., Shanghai
People’s Republic of China
100
USD
500
Synthes (Suzhou) Medical Trading Co. Ltd., Suzhou
People’s Republic of China
100
USD
6,000
Synthes Peru SAC., Lima
Peru
100
PEN
10,147
Synthes Poland Sp. z.o.o., Warsaw
Poland
100
PLN
8,000
Synthes Comercializaçao de dispositivos médicos, Lda., Amadora
Portugal
100
EUR
249
Synthes Ltd., Moscow
Russia
100
RUB
0.5
Synthes Singapore Pte Ltd., Singapore
Singapore
100
SGD
1,050
Synthes Slovakia s.r.o., Bratislava
Slovakia
100
EUR
5
Synthes (Proprietary) Ltd., Johannesburg
South Africa
100
ZAR
10
Synthes-Stratec S.A., Madrid
Spain
100
EUR
14,613
Synthes AB, Solna
Sweden
100
SEK
100
Synthes Bettlach GmbH, Bettlach
Switzerland
100
CHF
2,000
FR38
Financial Review
Synthes. Annual Report 2010
Nominal share Name, domicile
Country
Percentage held
capital in 1,000
Synthes Finanz AG, Zuchwil
Switzerland
100
CHF
1,000
Synthes GmbH, Oberdorf
Switzerland
100
CHF
1,000
Synthes Produktions GmbH, Hägendorf
Switzerland
100
CHF
350
Synthes Holding AG, Solothurn
Switzerland
100
CHF
507,800
Synthes Almaco Holding AG, Zuchwil
Switzerland
100
CHF
Synthes Medical Taiwan Ltd., Taipei
Taiwan
100
TWD
100
Synthes Tibbi Cihazlar Sanayi Ve Ticaret Limited Sirketi, Istanbul
Turkey
100
TRY
5
Synthes Ltd, Hertfordshire
United Kingdom
100
GBP
20
Anspach Europe Limited, High Wycombe
United Kingdom
100
GBP
0.3
The Anspach Effort, Inc.
USA
100
USD
3.3
HFSC Company
USA
100
Partnership
25,000
Norian Corporation
USA
100
USD
-
Spine Solutions, Inc.
USA
100
USD
-
Subsidiary Canada, Inc.
USA
100
USD
-
Synthes USA HQ, Inc.
USA
100
USD
-
Synthes USA Sales, LLC
USA
100
USD
-
Synthes USA, LLC
USA
100
USD
-
Synthes USA Products, LLC
USA
100
USD
-
Synthes Corporate, Inc.
USA
100
USD
-
Synthes LAT, Inc.
USA
100
USD
-
N Spine, Inc.
USA
100
USD
-
Synthes USA Development Center, LLC
USA
100
USD
-
Synthes Vietnam OMLLC, Ho Chi Minh City
Vietnam
100
USD
600
21 Acquisitions The Anspach Effort, Inc.
On November 5, 2010, the Group purchased 100% of the outstanding stock of The Anspach Effort, Inc. (Anspach), a developer, manufacturer and marketer of surgical power tools for use in neurosurgery, ENT and orthopedics. The consolidated financial statements include the operations of Anspach from the date of acquisition forward. The acquisition was made for the purpose of establishing a worldwide dedicated power tools division, optimally positioned to offer better solutions to a wider variety of surgeon specialists, with the goal of improving clinical outcomes through a focus on education, quality, and innovation. The acquisition price was US$ 182.9 million consisting entirely of cash. At the acquisition date, the cash consideration was financed from available cash balances of the Group. Under purchase accounting, the total purchase price is allocated to assets acquired and liabilities assumed based on their estimated fair values.
Financial Review
FR39
Financial Review. Note C
The purchase price has been allocated to the acquired assets and liabilities based on fair values as follows: Amount in 1,000 US$ Current assets, including accounts receivable, inventory, and other assets Property, plant and equipment Intangible assets Liabilities, including accounts payable, warranties, and accrued expenses Total identifiable net assets Goodwill
22,466 100,400 (8,469) 131,794 51,063
Total consideration
The fair values of the Anspach agent and customer relationships are included as intangible assets on the consolidated balance sheet. These intangible assets acquired of US$ 21.5 million and US$ 35.2 million, respectively, are being amortized over estimated useful lives of 27 and 24 years, respectively, based on an analysis of agent and customer turnover. The value assigned to Anspach’s agent and customer relationships was determined by using a multi-period excess earnings method. The estimated cash flows were based on revenues for those existing customers net of operating expenses and net of capital charges for other tangible and intangible assets that contribute to the projected cash flow from those customers. The projected revenues were based on assumed revenue growth rates and customer renewal rates. Operating expenses were estimated based on the supporting infrastructure expected to sustain the assumed revenue growth rates. Net capital charges for assets that contribute to projected customer cash flow were based on the estimated fair value of those assets. A discount rate of 12% was deemed appropriate for valuing the existing customer base and was based on the risks associated with the respective cash flows taking into consideration the Group’s weighted average cost of capital. Additionally, the fair value of Anspach’s core technologies (Pneumatic and Electric) are included as intangible assets on the consolidated balance sheet at US$ 10.5 million, and are being amortized over estimated useful lives ranging from 8 to 10 years based upon expected future revenues realized from these technologies. The value assigned to Anspach’s core technology (electric and pneumatic) was determined by using a relief from royalty approach. Developed and core technology, which consists of products that have reached technological feasibility, includes products in Anspach’s current product line. The royalty rates used to value the technology were based on the estimated profit split attributable to the Technology and third party licensing agreements relating to similar technologies. A discount rate of 12% was deemed appropriate for valuing developed and core technology and was based on the risks associated with the respective royalty savings taking into consideration the Group’s weighted average cost of capital. It is not anticipated that such assets will have significant residual value. It is not anticipated that such assets will have significant residual value. The remaining US$ 33.2 million of intangibles acquired represent corporate trade name, and are not being amortized as the asset’s useful life is estimated to be indefinite based on the history of the name in the marketplace, management’s in-
FR40
17,397
Financial Review
182,857
Synthes. Annual Report 2010
tended use for the name going forward, and the expectation of cash flows for an indefinite period. The value assigned to Anspach’s corporate trade name was determined by using the relief from royalty approach. The royalty rate used to value the trade name was based on estimates of prevailing royalty rates paid for the use of similar trade names in market transactions based on the visibility of the trade name in the marketplace and estimated profit split attributable to the name. A discount rate of 12% was deemed appropriate for valuing Anspach’s trade name and was based on the risks associated with the respective royalty savings taking into consideration the Group’s weighted average cost of capital. Additionally, acquired inventories and fixed assets were written up to fair value by US$ 1.3 million and US$ 10.2 million, respectively. The written-up inventory is being amortized over four months based on inventory turns, while the write-up of fixed assets are being depreciated over various estimated useful lives ranging from zero to 30 years. Goodwill of US$ 51.1 million arising in the acquisition, attributable to strategic business synergies, has been allocated to the North American reporting unit and will be deductible for tax purposes. The fair values of certain fixed assets (machinery and equipment) and intangible assets acquired were determined by an independent valuation. Costs related to the acquisition, which include legal, accounting, government filing and valuation fees, in the amount of US$ 0.6 million have been charged directly to operations and are included in general and administrative expenses in the 2010 consolidated statement of operations. The amounts of Anspach’s net sales and earnings included in the consolidated statement of operations (from the date of acquisition) for 2010 are US$ 10.7 million and US$ 1.1 million, respectively. The unaudited pro forma information that follows assumes that Anspach had been acquired at the beginning of 2009 and includes the effects of depreciation and amortization of acquired fixed assets and intangible assets that were written up to fair value, respectively, from that date. The pro forma information is presented for information purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition taken place at the beginning of 2009.
Net sales Net earnings Basic and diluted earnings per share (expressed in US$)
2010
2009
in 1,000 US$
in 1,000 US$
3,742,851
3,456,801
908,576
826,827
7.66
6.97
22 AO Foundation
On August 28, 2006, the Group acquired the Synthes trade names and marks and substantially all of the intellectual property, including patents and patent rights from the AO Foundation (“AO”). The acquisition cost was CHF 999.9 million (US$ 809.3 million) including a combination of stock CHF 503.4 million (US$ 407.5 million), cash CHF 100.0 million (US$ 80.9 million) at closing, CHF 75.0 million (US$ 60.7 million) due six months after closing, installment payments of CHF 300.00 million (US$ 242.8 million), and CHF 21.5 million (US$ 17.4 million) including the assumption of certain liabilities and transaction costs net of imputed interest. The future payments are due as follows:
Financial Review
FR41
Financial Review. Note C
Amount Year ending December 31
in 1,000 US$
2011
53,307
2012
26,654
Total installment payments
79,961
Less: amount representing interest
(1,990)
Present value of installment payments
77,971
The Group paid consideration fees to the AO. Consideration fees paid during 2010 and 2009 were US$ 53.2 million and US$ 47.9 million, respectively. Additionally, the Group has a receivable due from the AO in connection with the acquisition of assets as disclosed in Note C4. The AO will continue the mission of educating surgeons, conducting basic and clinical research and providing technical services to assure the safety and efficacy of osteosynthesis products. 23 Fair value measurement Derivatives
The Group has entered into forward exchange contracts to minimize the impact of currency fluctuation on transactions and cash flows. No foreign exchange contracts were designated as cash flow hedges in 2010 or 2009. Since there were no outstanding foreign exchange cash flow hedges as of December 31, 2010, there were no deferred gains (losses) to affect earnings in 2010 or in future periods. Changes in the fair value of the foreign exchange contracts which were not designated as cash flow hedges have been recorded currently in the consolidated statements of operations in “foreign exchange (losses) gains.” At December 31, 2010 and 2009, the net fair value of these undesignated derivatives was a gain of US$ 23.8 million and US$ 3.8 million, respectively. The Group had an interest rate derivative outstanding as of December 31, 2010 that is being accounted for as a cash flow hedge. Changes in the fair value of this contract are deferred in other comprehensive income in the equity section of the consolidated balance sheets. At December 31, 2010, the net fair value of this contract was a loss of US$ 4.3 million. The Group did not have any interest rate derivatives in 2009. Effective January 1, 2008, the Group adopted the provisions of the Fair Value Measurements and Disclosures topic of the FASB Codification, for financial assets and liabilities measured on a recurring basis. This topic applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis and establishes a framework for measuring fair value of assets and liabilities and expands disclosures about fair value measurements. The Group’s adoption of the Fair Value Measurements and Disclosures topic was limited to its foreign currency forward derivative contracts, and there was no impact to the consolidated financial statements as a result of the adoption. In accordance with FASB Codification topic, Fair Value Measurements and Disclosures, the Group deferred the adoption of the provisions for its nonfinancial
FR42
Financial Review
Synthes. Annual Report 2010
assets and nonfinancial liabilities until January 1, 2009. As of January 1, 2009, the Group adopted the provisions for its fair value measure of nonfinancial assets and liabilities and there was no material impact on the consolidated results of operations. On a nonrecurring basis, the Group uses fair value measures when analyzing asset impairment. Long-lived assets, including intangible assets and goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value. During the fourth quarter of each year, the Group evaluates goodwill for impairment at the reporting unit level in addition to indefinite-lived intangible assets. FASB Codification topic, Fair Value Measurements and Disclosures, includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions and counterparty credit risk. The fair value hierarchy consists of the following three levels: Level 1: Inputs are quoted prices in active markets for identical assets or liabilities. Level 2: Inputs are quoted prices for similar assets or liabilities in an active market,
quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. Level 3: Inputs are derived from valuation techniques in which one or more sig-
nificant inputs or value drivers are unobservable. The Group utilizes the market approach to measure fair value for financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Group’s Level 2 available-for-sale marketable securities primarily include U.S. government securities. The fair value of the securities is determined, by an independent pricing service, using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. The Group has not adjusted the prices obtained from the independent pricing service. Foreign currency exchange contracts are valued using a market approach based on foreign currency exchange rates obtained from active markets. The estimated fair value of forward currency exchange contracts represents the measurement of the contracts at month-end spot rates as adjusted by current forward points. The spot rates and forward points are provided by an independent pricing service.
Financial Review
FR43
Financial Review. Note C
The following tables summarize the valuation of the Group’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009, and the basis for that measurement (in 1,000 US$):
Quoted prices in active markets for identical assets or liabilities (Level 1)
Significant other observable inputs (Level 2)
1,254,683
-
1,254,683
-
25,504
-
25,504
-
Foreign exchange (FX) contracts (2)
1,722
-
1,722
-
Interest rate swaps (3)
4,325
-
4,325
-
Total fair value measurement December 31, 2009
Quoted prices in active markets for identical assets or liabilities (Level 1)
Significant other observable inputs (Level 2)
Significant unobservable inputs (Level 3)
5,903
-
5,903
-
2,086
-
2,086
-
Total fair value measurement December 31, 2010
Significant unobservable inputs (Level 3)
Assets: Marketable securities Foreign exchange (FX) contracts (1) Liabilities:
(1) Contained
within prepaid expenses and other current assets in the consolidated balance sheet as of December 31, 2010.
(2) Contained
within accrued expenses other, and other long-term liabilities in the consolidated balance sheet as of December 31, 2010.
(3) Contained
within accrued expenses other in the consolidated balance sheet as of December 31, 2010.
Assets: FX contracts (1) Liabilities: FX contracts (2) (1) Contained
within prepaid expenses and other current assets in the consolidated balance sheet as of December 31, 2009.
(2) Contained
within accrued expenses other, and other long-term liabilities in the consolidated balance sheet as of December 31, 2009.
Although there were no fair value adjustments to nonfinancial assets, the Group typically uses the following valuation techniques (all Level 3) to determine the fair value of its assets measured on a nonrecurring basis: Goodwill When performing goodwill impairment tests, the Group estimates the fair value of its reporting units using an income approach, generally a discounted cash flow methodology, that includes assumptions for, among other things, forecasted revenues, gross profit margins, operating profit margins, working capital cash flow, growth rates, income tax rates, expected tax benefits and long-term discount rates, all of which require significant judgments by management. The Group also considers comparable market data based on multiples of revenue as well as the reconciliation of the Group’s market capitalization to the total fair value of its reporting units. There are, however, inherent uncertainties related to these factors and to
FR44
Financial Review
Synthes. Annual Report 2010
management’s judgment in applying them to this analysis. Nonetheless, management believes that the combination of these two methods provides a reasonable approach to estimate the fair value of the Group’s reporting units. If the estimated fair value of any reporting unit is less than its carrying value, an impairment exists. Intangible Assets When performing an intangible asset impairment test, the Group estimates the fair value of the asset using either a discounted cash flow or a relief of royalty methodology, which includes assumptions for, among other things, budgets and economic projections, market trends, product development cycles and long-term discount rates. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, and are evaluated for potential impairment when current facts or circumstances indicate that the carrying value of such assets may not be recoverable. Indefinite-lived intangible assets are not amortized but are required to be tested for potential impairment at least annually, or whenever impairment indicators exist. If the estimated fair value of the asset is less than its carrying value, an impairment exists. Financial derivatives
Forward exchange contracts The Group has entered into forward exchange contracts to minimize the impact of currency fluctuations on transactions and cash flows. These contracts have not been designated as hedges and changes in their fair value have been recorded in the consolidated statements of operations in “other income (expense).” As these contracts settle, the realized gain or loss attributed to changes in foreign currency is classified as an investing activity in the statements of cash flows. The Group recognized US$ 8.2 million and US$ 6.4 million in realized gains for the years ended December 31, 2010 and 2009, respectively, related to changes in foreign currency on settled intercompany debt agreements and related forward exchange contracts. The impact of the foreign exchange derivatives, related to intercompany debt (mentioned above), on the Group’s net earnings was minimal as realized gains and losses were offset by unrealized gains and losses. Interest Rate Swap In January 2010, the Group entered into a 6 ½ year floating-to-fixed interest rate swap agreement with notional amount of CHF 60 million at the start of the agreement and increasing to CHF 120 million in June 2011. The interest rate swap is designated as a cash flow hedge of the floating interest rate obligation under the Group’s CHF 120 million credit facility due December 2016 as disclosed in Note 8. The outstanding market value of the interest rate swap is a CHF 4.1 million (US$ 4.3 million) unrealized loss as of December 31, 2010 which is recorded in accrued expenses other with the offset recorded in accumulated other comprehensive income in the stockholders’ equity section of the consolidated balance sheets.
Financial Review
FR45
Financial Review. Note C
24 Summary of Director and Group Management Committee
Compensation for 2010
Name
Position
Dr. h.c. mult.
Chairman –
Hansjörg Wyss, MD
Executive
Mr. Charles Hedgepeth
Vice Chairman –
Share Awards Earned
Salary & Con-
Committee
Bonus
sulting Fees
Fees
Payments
Other (1)
Number
Amount
Total
in 1,000 US$
in 1,000 US$
in 1,000 US$
in 1,000 US$
of Shares
in 1,000 US$
in 1,000 US$
650
-
4,146
493
13,000
1,745
7,034
-
-
-
10
1,700
228
238
160
-
-
23
2,150
289
472
-
20
-
-
1,500
201
221
-
-
-
-
1,500
201
201
-
10
-
-
1,500
201
211
-
81
1,000
-
1,500
201
1,282
-
100
-
-
1,500
201
301
-
69
-
-
1,500
201
270
-
10
-
-
1,500
201
211
-
-
-
-
1,500
201
201
810
290
5,146
526
28,850
3,870
10,642
Non-Executive Dr. Roland Brönnimann (2)
Director – Non-Executive
Mr. Robert Bland
Director – Non-Executive
Mr. Daniel Eicher
Director – Non-Executive
Dr. David Helfet
Director – Non-Executive
Mr. Amin Khoury (3)
Director – Non-Executive
Mr. André Mueller
Director – Non-Executive
Mr. Felix Pardo
Director – Non-Executive
Mr. Jobst Wagner
Director – Non-Executive
Ms. Amy Wyss
Director – Non-Executive
(1) Includes
retirement, health and insurance payments, reimbursement of legal fees and other perquisites and compensation benefits paid during the year.
(2) Dr.
Roland Brönnimann also provided consulting services to the Group in addition to his work as a Director. A portion was paid in cash and a portion is paid in stock.
(3) Mr.
Amin Khoury received a bonus for special project-related services provided during the year.
In the aggregate, the compensation paid to the members of the Group Management Committee in fiscal year 2010 amounted to US$ 16.8 million. 25 Risk assessment disclosures
The Corporate Risk Management function coordinates and aligns the risk management processes, and reports to the Board of Directors and Audit Committee on a regular basis on risk assessment and risk management. Organizationally, the responsibility for risk assessment and management is allocated to the divisions, with specialized corporate functions such as compliance, finance, operations, legal, quality, regulatory and information technology providing support and controlling the effectiveness of the risk management by the divisions. Financial risk management is described in more detail in Notes B17, B18 and B19 to the Group’s consolidated financial statements.
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Financial Review
Synthes. Annual Report 2010
Synthes, Inc. and Subsidiaries
Note to Directors and Shareholders
Holding company financial statements
Holding company financial statements and footnotes are a Swiss Stock Exchange (SIX Swiss Exchange) requirement for Swiss companies. As Synthes, Inc. is a Delaware (U.S.A.) company, and not subject to these requirements, we have elected to omit the holding company financial statements and footnotes in the 2010 annual report of Synthes, Inc. Proposal by the Board of Directors for the Dividends in 1,000 US$ Beginning additional paid-in capital at December 31, 2009
1,932,814
Beginning retained earnings at December 31, 2009
3,169,123
Subtotal: Beginning additional paid-in capital and retained earnings at December 31, 2009
5,101,937
Increase in additional paid-in capital in 2010
5,711
Profit for 2010
907,733
Dividends paid in 2010
(151,613)
Proposed dividends in 2011
(227,855)
Additional paid-in capital and retained earnings after proposed dividends
5,635,913
The proposed aggregate amount of dividends is of a preliminary nature as it is calculated on the basis of all registered shares being issued on December 31, 2010 (118,777,075 registered shares), less treasury shares (44,140). Note that due to further increases in share capital out of conditional capital, the aggregate amount of dividends will be determined on the basis of the number of shares issued as of March 3, 2011 (each and all of the outstanding shares are entitled to an individual dividend of CHF 1.8000/US$ 1.9190 per share) , which represents a premium over prior dividend payment levels by the Group. Synthes, Inc. is a Delaware (U.S.A.) company and, therefore, is permitted to include additional paid-in capital with retained earnings in its determination of surplus for paying dividends.
Financial Review
FR47
Financial Review
Synthes, Inc. and Subsidiaries
Investor Key Data
Capital structure
The share capital of Synthes, Inc. as of December 31, 2010 and 2009 consisted of 118,777,075 and 118,717,913 registered shares issued (118,732,935 and 118,681,184 registered shares outstanding), respectively, with par value of CHF 0.001 per share and stated capital of CHF 0.50 per share. Each share holds one vote. The total number of shares which Synthes, Inc. is authorized to issue under the Certificate of Incorporation is 150,150,000 shares denominated in Swiss Francs divided into two classes as follows: 150,000,000 shares of Common Stock, par value CHF 0.001 per share and stated capital of CHF 0.50 per share. 150,000 shares of Preferred Stock, par value CHF 0.01 per share and stated capital of CHF 5.00 per share. On April 4, 2000, at the first general meeting of the shareholders, an equity incentive plan was approved and adopted. During 2010, the equity incentive plan was renewed for an additional ten years. This plan will allow for compensation of senior executives in accordance with international practices. Under the terms of the equity incentive plan, the Group may issue up to 1,500,000 shares of Common Stock CHF 0.001 par value and CHF 0.50 stated capital per share. The shareholders waived their preemptive rights in this respect. Preferred Stock is authorized only for issuance upon exercise of rights issued pursuant to the Synthes Shareholders’ Rights plan, designed to protect minority shareholders in a takeover situation. Development of share price
During the year 2010, the Synthes, Inc. share price decreased by 6.7% to CHF 126.3 per share. This performance compares to the development of the Swiss Market Index (SMI) which decreased by 1.7% during the same period. The share price saw its low on August 31, 2010 when it hit CHF 112.0 and reached its high of CHF 145.3 on January 14, 2010. The average share price for 2010 was CHF 125.0.
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Financial Review
Synthes. Annual Report 2010
Price comparison Synthes shares (SYST) – Swiss Market Index (SMI)
% 120 115 110 105 100 95 90 85 80 75
11.2010
9.2010
7.2010
5.2010
3.2010
1.2010
70
Synthes Shares (SYST) Swiss Market Index (SMI)
2004*
2005
2006
2007
2008
2009
2010
Net Earnings per Share (US$)
3.17
3.79
4.38
5.16
6.19
6.94
7.65
* Pro forma: includes the former Mathys organization and Spine Solutions Inc. as if the acquisitions by Synthes had occurred at the beginning of 2003.
Financial Review
FR49
Financial Review
Restrictions subject to US Securities Law Synthes management believes certain statements in this annual report may constitute “forwardlooking statements“ within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include but are not limited to those with respect to the potential for Synthes to offer new products and market existing ones, as well as the expected revenues and revenue growth of Synthes. These statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made. Actual results may differ materially from those expressed or implied. Such differences may result from the ability of Synthes to successfully develop and introduce new products and services and market existing products and services in a competitive marketplace and changes in the economic conditions that may affect the performance of the operations of Synthes. In addition, changes in competitive conditions and regulatory developments may affect future business performance, and changing market conditions may affect the valuation of Synthes securities. In addition, it should be noted that past financial and operational performance of the company is not necessarily indicative of future financial and operational performance. Synthes undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. The securities of Synthes, Inc. have been offered and sold outside the United States and have not been and will not be registered under the U.S. Securities Act of 1933, as amended (“the Securities Act“). Such securities may not be offered, sold or transferred in the United States or to U.S. persons (as defined in regulations of the Securities Act), except pursuant to a registration statement filed under the Securities Act or under an applicable exemption under the Securities Act. Hedging transactions involving such securities may not be conducted unless in compliance with the Securities Act. The Synthes securities are deemed “restricted securities“ as that term is defined in rule 144 under the Securities Act.
FR50
Financial Review
If you didn't know this was an implant … Concept and design
USA and Canada
Europe, Middle East and Africa
Synthes, Marketing Services & Communications
Synthes, Inc.
Synthes GmbH
1302 Wrights Lane East
Glutz-Blotzheim-Str. 3
Synthes, Investor Relations
West Chester, PA 19380
4500 Solothurn
Solothurn, Switzerland
USA
Switzerland
Tel. +1 610 719 5000
Tel. +41 32 720 40 60
Litho
US Customer Service (toll free):
Fax +41 32 720 40 61
Fotolitho Sturm
Tel. +1 800 523 0322
[email protected]
Asia Pacific
Latin America
Photographer
Synthes Asia Pacific
Synthes LAT, Inc.
Marco Aste
Suite 1a
703 N.W. 62nd Ave.
Basel, Switzerland
Building 3, Level 3
Suite 550
20 Bridge Street
Miami, FL 33126
Pymble, NSW 2073
USA
Australia
Tel. +1 305 341 1022
Tel. +61 2 9449 0400
Fax +1 305 341 1028
Fax +61 2 9449 0499
[email protected]
Ö035.000.170öä This annual report is published in English only.
www.synthes.com
Synthes, Inc. Annual Report 2010
Projekt1 14.02.11 10:25 Seite 1
035.000.170 Annual Report 2010 © Synthes, Inc.
Muttenz, Switzerland
New perspectives. Annual Report 2010.
If you didn't know this was an implant … Concept and design
USA and Canada
Europe, Middle East and Africa
Synthes, Marketing Services & Communications
Synthes, Inc.
Synthes GmbH
Oberdorf, Switzerland
1302 Wrights Lane East
Glutz-Blotzheim-Str. 3
West Chester, PA 19380
4500 Solothurn
Synthes, Investor Relations
USA
Switzerland
Solothurn, Switzerland
Tel. +1 610 719 5000
Tel. +41 32 720 40 60
US Customer Service (toll free):
Fax +41 32 720 40 61
Tel. +1 800 523 0322
[email protected]
Asia Pacific
Latin America
Litho
Synthes Asia Pacific
Synthes LAT, Inc.
Photographer
Suite 1a
703 N.W. 62nd Ave.
Marco Aste
Building 3, Level 3
Suite 550
Basel, Switzerland
20 Bridge Street
Miami, FL 33126
Pymble, NSW 2073
USA
Printed by
Australia
Tel. +1 305 341 1022
Binkert Druck AG
Tel. +61 2 9449 0400
Fax +1 305 341 1028
Laufenburg, Switzerland
Fax +61 2 9449 0499
[email protected]
Projekt1 14.02.11 10:25 Seite 1
Ö035.000.170öä This annual report is published in English only.
www.synthes.com
Synthes, Inc. Annual Report 2010
Muttenz, Switzerland
035.000.170 Annual Report 2010 © Synthes, Inc.
Fotolitho Sturm,
New perspectives. Annual Report 2010.
