Business Overview 2006 - Synthes

Annual Report 2006

Content
Company Profile | 1
Preface | 3
Letter to Shareholders | 4
Business Reports | 7
North America | 9
Europe | 11
Asia Pacific | 13
Latin America, Middle East and Africa | 15
Poland | 17
Product Highlights | 19
Trauma. Reamer-Irrigator-Aspirator | 20
Spine. SynFix-LR | 22
Cranio-maxillofacial. Patient Specific Implants | 24
Sustainability | 27
Health, Safety and Environment | 29
Employees | 31
Outlook | 33
Corporate Governance | 35
Financial Review | 53
LCP Locking Screw

Significant Facts
Net sales in US$ million
Operating profit before in-process research
and development (IPR&D) in US$ million
2002
1,017.2
2002
396.2
2003
1,229.0
2003
443.8
2004
1,779.3
2004
504.7
2005
2,078.2
2005
662.2
2006
2,391.6
2006
762.6
0 1000 2000 3000
0 300 600 900
Net earnings before IPR&D in US$ million
Free cashflow in US$ million
2002
253.0
2002
209.9
2003
290.1
2003
203.3
2004
323.7
2004
301.1
2005
436.0
2005
337.1
2006
508.8
2006
343.6
0 200 400 600
0 100 200 300
Research & development in US$ million
Employee development
24.1%
2002
50.8
2002
3,803
2003
66.2
2003
25.5%
4,290
2004
109.5
2004
6,711
30.7%
2005 114.8
2006 125.6
0 50 100 150
2005
2006
7,627
8,451
26.7%
26.5%
Number of employees at year-end
Sales force (in % of average number of employees)

Consolidated Results
Sales per region in US$ million
1
2
3
4
2006 % of sales 2005 % of sales
North America 1,525.1 63.8 1,329.2 64.0
Europe 519.1 21.7 445.1 21.4
Asia Pacific 220.1 9.2 197.6 9.5
Rest of world 127.3 5.3 106.3 5.1
2006
3
2005
4 1
4 1
3
2
2
Margin overview in US$ million
1
2
3
4
2006 % of sales 2005 % of sales
Gross margin 1,957.9 81.9 1,715.5 82.5
Ebit margin 764.8 32.0 667.3 32.1
Net profit margin 508.8 21.3 436.0 21.0
R&D margin 125.6 5.3 114.8 5.5
1
2
-0.1%
3 637
-0.6%
3
+0.3%
4
-0.2% 2006
2005
Assets – Current assets in US$ million
2006 % of total 2005 % of total
assets
assets
2006
2005
1
Current assets 1,286.6 28.3 1,123.0 32.6
5 1
5 1
Assets – Non-current assets in US$ million
4
2
3
4
5
2006 % of total 2005 % of total
assets
assets
Property, plant & equipment 545.0 12.0 506.2 14.7
Intangible assets 1,743.3 38.3 893.3 26.0
Goodwill 911.6 20.0 853.6 24.8
Other assets 62.8 1.4 64.1 1.9
3
2
4
3
2
Liabilities and equity in US$ million
2006 % of total 2005 % of total
assets
assets
2006
2005
1
2
3
4
Current liabilities 672.8 14.8 556.2 16.2
Long-term liabilities 497.8 10.9 496.6 14.4
Retained earnings 1,327.4 29.2 880.8 25.6
Other equity 2,051.3 45.1 1,506.6 43.8
1
2
1
2
3
3
4
4

Synthes. Annual Report 2006
Company Profile
Synthes is a leading global medical device company. We develop, produce
and market instruments, implants and biomaterials for the surgical
fixation, correction and regeneration of the human skeleton and
its soft tissues. We are represented on every continent and employ
approximately 8,500 people worldwide. We generate revenues of
over US$ 2.3 billion and make a net profit of US$ 509 million.
Synthes establishes the foundations for its excellent market position
by continuously developing better solutions. Our goal is to provide
the safest and most advanced implants, instruments and technologies
that ensure reliable operating procedures, rapid recovery and a
pain-free life after surgery. We guarantee high quality, constant innovation
and total concentration on the needs of our customers.
Synthes is the world leader in traumatology, ranks among the top
three companies for spinal devices and is at the forefront of the craniomaxillofacial
business. We are an innovative pioneer in the field of
biomaterials such as resorbable implants and bone graft substitutes,
and have become a leader in non-fusion technologies by developing
nucleus and total intervertebral disc replacements.
Working closely together with surgeons in hospitals all over the world,
our product development teams of scientists, engineers and product
managers identify real clinical needs. This provides the basis for developing
products with increased benefits for patients, surgeons and
OR personnel.
The Functional Structure
of Global Synthes
North America
Asia Pacific Europe Latin America,
Middle East and Africa
Trauma
Spine
Cranio-maxillofacial
Biomaterials
Power Tools
Operations
Operations
Global services: Finance, Human Resources, Information Technology, Legal, Purchasing, Quality, Regulatory Affairs
1

Preface
Expert Tibial Nail
2

Synthes. Annual Report 2006
Up Close
While you browse through the pages that follow, we invite
you to take a close look at inspiring shapes and textures,
and hope you will discover many new connections
and impressions. In this annual report we present some
of our products from an unusual perspective – a very
close perspective. At first glance they may appear merely
functional, but under the scanning electron microscope
and the macro lens, ordinary implants and instruments
take on a completely different and abstract form. The
magnified depiction seems almost to become a work of
art with its own aesthetics. Observed at a strong magnification
and from odd angles, familiar products suddenly
become strange objects. The deeper we delve into the
material, the more its qualities change, revealing a surprisingly
artistic aspect which its inventors never intended
to create. While you study our report, you are
invited to guess which products are depicted. At the
bottom of each image you will find the answers to these
little mysteries.
3

Letter to Shareholders
Letter to Shareholders
In 2006 Synthes reached important milestones in its history. We signed an agreement with the
AO Foundation concerning the purchase of the Synthes brand name, trademark and intellectual property.
In addition, we gained approval for the sale of a new artificial disc, Prodisc-L, in the United States.
Dear shareholders, employees and friends of Synthes
Once again, 2006 was a very successful year for Synthes both operationally
and strategically. We agreed to acquire a number of intellectual
properties from the AO Foundation related to our business.
This transaction resulted in the transfer of all patents, the Synthes
trademark and the brand name to our company, thereby enhancing
our independence and the financial strength of the AO Foundation.
The longstanding cooperation between Synthes and the AO Foundation
will be intensified by a special agreement, which allows the AO
to further expand its regional educational activities and programs for
training surgeons and conducting basic research. Synthes will continue
to submit all new products to the Technical Commission of the AO
Foundation for quality assurance and approval.
Another important milestone in 2006 was the FDA approval for Synthes
to sell Prodisc-L, a newly developed artificial disc, in the US market.
This arthroplasty device is a revolutionary method for treating degenerative
disc disease, and has found high acceptance with key
experts in spinal surgery. Like all new technologies, Prodisc-L will require
some time to penetrate a broader market. We will strive to gain
support from a majority of surgeons and reimbursement parties by
convincing them of the long-term benefit for the patient. We strongly
believe that this treatment of the degenerative disc disease is the
beginning of a basic change in the management of spinal disorders.
Additional innovative developments include the recently launched
Reamer-Irrigator-Aspirator (RIA), described in more detail on page 20,
which will further enhance our position in intramedullary nailing, and
the launch of the antibiotic coated Tibia Nail which will help to substantially
reduce the risk of an expensive and painful infection in open
tibia fractures.
Outstanding operational results worldwide
Sales grew by 15.1% and our operating profits amounted to US$ 763
million, representing an increase of 15.2% versus 2005. We gained
market share in all our businesses, with Trauma once again being the
most important growth engine. Not only is it our largest division, it
also generated the strongest growth rate. The continued success we
experience with our constantly growing Locking Compression Plate
(LCP) portfolio has received strong support from the four Expert Nails
which are now fully known and used in all regional markets.
4

Synthes. Annual Report 2006
Vectra Plate
I am very happy with the strong growth performance of Synthes Europe.
The local currency growth rate of 15.5% in a well developed
market with hardly any room for price increases clearly indicates that
we were able to substantially gain market share. We have been the
leading company in Trauma for many years, and increasingly can claim
the dominant position in European countries for our Spine and Craniomaxillofacial
businesses. As a worldwide company we are now able
to introduce new products at an accelerated pace and have therefore
gained substantial market share throughout Asia and especially in
Japan, Australia and New Zealand. We are also very pleased with our
increased penetration in the emerging markets of Central and Eastern
Europe.
and offer thousands of training days to surgeons, OR-personnel and
our own staff.
I am grateful to our employees, who have made our company so successful.
I would also like to express my gratitude for our long-standing
and loyal customers. And we thank our shareholders for the confidence
they have shown in our company. We hope you enjoy this
annual report, which takes a close look at the artistic component of
our products.
Human Resources development
At the end of 2006 Synthes employed 8,451 people worldwide, and
we created 824 new jobs throughout the year. We offer a large variety
of challenges for qualified and highly motivated individuals seeking
a career in a global company. It is thanks to the day-to-day contribution
of each individual employee that we once again were able to
innovate our product portfolio, strengthen our service to hospitals,
Hansjörg Wyss
Chairman and CEO
5

Business Reports
CMF Screwdriver Handle
6

Synthes. Annual Report 2006
Business Reports
North America | 9
Europe | 11
Asia Pacific | 13
Latin America, Middle East and Africa | 15
Poland | 17
7

Business Reports. North America
In North America, all three divisions outperformed
the market. Launches of new products with
true clinical benefits, intensified market presence,
an expanded training portfolio, and added
services for customers contributed to this outstanding
result.
SynFix-LR
8

Synthes. Annual Report 2006
Business Report. North America
Sustaining a market share of 55% for the Trauma business in an increasingly
competitive environment is a challenging task in itself, but
exceeding market growth rates and gaining further market share can
only be accomplished by an organization in peak condition. Synthes’
Trauma business in North America once again outstripped the company’s
average growth in 2006. We introduced over 40 new products
to the market; ten of these launches had a significant impact on
growth. Most of the major launches were additions to the Locking
Compression Plate (LCP) system, which now consists of 32 product
lines. In intramedullary nailing, the introduction of the Expert Lateral
Femoral Nail (LFN) was the main market launch of the year. The rollout
of the Headless Compression Screw in the subsegment for minifragments
was another important highlight.
Added value for customers due to intensified presence
We further expanded the specialized Trauma sales force in North
America, and at the same time we were able to increase per capita
productivity. It has always been our aim to heighten our presence in
the market and to offer the most outstanding service to our customers.
With an enlarged sales force we are in a position to intensify
our efforts to bring added value to hospitals, be it in the areas of
training, inventory management and technical support during surgeries,
or the optimization of the overall treatment process in complex
cases.
Training courses for surgeons and OR-personnel were once again at
the top of our priority list, and our activities in this field were manifold.
In the fourth quarter of 2006 Synthes introduced a training program
that addresses the specific needs of resident surgeons. By the
end of the year over 500 surgeons had already enrolled in the program.
Although Prodisc-L had very little impact on sales in 2006, Synthes’
Spine business still outperformed the market for spinal devices. Business
was fueled by the introduction of our new pedicle screw system
Pangea, the additional dynamic cervical plating system Vectra-T, the
cervical Axon System, and the Anterior Tension Band. Over a third of
the revenues of the North American Spine division were generated
by products introduced to the market within the last three years.
As in all other businesses, we increased the sales force in Spine. A
great deal of attention was given to enhancing the product knowledge
and selling techniques of our sales personnel in order to cope
with the increasing pressure against higher prices in the healthcare
sector. These measures will also enable our consultants to successfully
promote our innovative products, which continue to address previously
unsolved clinical issues.
Portfolio extension for neurosurgeons
Synthes’ North American Cranio-maxillofacial organization is still the
largest in the region and holds a market share of well over 50%. We
have been able to maintain this position by continually launching innovative
products to the market. The Low Profile Neuro System has
been the main growth driver for many years, but recent introductions
such as the Sternal Fixation System, the Patient Specific Implant (see
page 24 in this report), and the PlusDrive System also support this
positive development. In 2006, Synthes focused on a moderate sales
force expansion and on a variety of training activities, both for our
own sales people and for customers throughout North America. The
CMF division concentrated especially on educating surgeons and ORpersonnel
working in the field of neurosurgery, the area in which we
launched the majority of our new CMF products during the past year.
Preparing to take on the arthroplasty market with Prodisc-L
The FDA approval for the launch of the artificial lumbar disc Prodisc-L
to the US market was one of the major events for the Spine division
in 2006. Since receiving approval, Synthes has initiated a controlled
rollout and has provided in-depth training to a significant number of
spine surgeons in how to diagnose suitable patients for total disc replacement
and in how to perform the surgical procedure systematically.
Despite the currently unsettled reimbursement environment for
disc arthroplasty, we view this market as a potentially huge area of
growth. We have therefore focused on positioning ourselves as the
provider of a very high quality product supported by a comprehensive
training program. Accordingly, our main strategy is to generate a
maximum number of excellent patient outcomes in order to build
a basis for long-term success in this new market.
9

Business Reports. Europe
In Europe Synthes can look back on one of its
most successful years, despite an increasingly difficult
market environment and pressure on prices.
The high growth rate and increased market shares
prove that our long-term investments are
paying off.
AO/ASIF Quick Coupling
10

Synthes. Annual Report 2006
Business Report. Europe
2006 was one of the best years for the European business. Sales in
local currency grew by 15.5% and for the first time broke the US$ 500
million mark. The reasons for this positive development are numerous
but can be ascribed mainly to the merger with Mathys. We benefited
from a uniform market in which we could fully leverage our
product portfolio as well as our training, manufacturing and logistics
activities. The investments in the sales force are producing positive
results and our consultants are performing at higher productivity
levels.
Products with true clinical benefits boost growth
But despite these positive results, the market environment in Europe
is difficult. The price increases which the market is willing to accept
hardly compensate for inflation rates. And new product introductions
only lead to higher selling prices if we are able to convince customers
that our innovations offer a substantial clinical benefit compared to
all other existing products for that specific indication. Due to the successful
launch of products that meet surgeons’ and patients’ needs,
Synthes significantly outperformed the market and gained market
shares across the board in 2006. In addition, we experienced strong
growth in Middle and Eastern European countries such as Russia,
Poland and the Czech Republic, where more government funds are
allocated to healthcare and individual purchasing power is increasing.
LCP and Expert Nailing System yield outstanding results
Once again the Locking Compression Plate (LCP) portfolio was a major
growth driver for the European Trauma business. Not only did the
system achieve a higher penetration but we also extended existing
systems and added several new product lines such as a variety of proximal
and distal LCP Tibia Plates, the LCP Olecranon Plate for the elbow,
and the LCP Proximal Femoral Plate, just to mention a few. Synthes’
global trauma market share is roughly 46%. In the subsegment
of plates and screws our market share has always been much higher
than that, and in 2006 it rose yet higher.
Unprecedented number of high-impact spine products
In 2006 Synthes introduced more high-impact spine products than in
any previous year. Vectra, Vectra-T (two dynamic cervical plates) and
Pangea (lumbar pedicle screw system) are only the most prominent
launches in Europe. With the artificial discs Prodisc-L for the lumbar
spine and Prodisc-C for the cervical spine, Synthes has established itself
as European market leader in disc arthroplasty. Further enhancements
to the instrumentation of both discs solidified their position as
the most user-friendly disc devices in this market. Not only has Prodisc
been a success in Europe, but it has also served as a door-opener to
new customers who subsequently switched to Synthes’ traditional
spine portfolio.
CMF – market leading position within reach
In Cranio-maxillofacial, Synthes is on the verge of becoming the market
leader in Europe. We have further expanded our market share and
have established ourselves in markets in which we previously lacked
a dedicated sales force. Mandible and midface fixation devices are
among the most demanded products. In addition, the Patient Specific
Implant System (PSI), contributed to the growth rate in the high teens.
Increased training for OR-personnel
In 2006 Synthes continued to develop its specialized sales forces in
Europe with the goal of supporting OR-personnel both inside and
outside the operating theatre. This support includes on-site training
in the use and maintenance of our products, inventory management,
and generally how to interact with surgeons and nurses in order to
maintain the high level of excellent outcomes achieved using Synthes
products.
Intramedullary nailing, on the other hand, offers room for further
share gains, despite the fact that Synthes is also the market leader in
this area. The introduction of the first nails of the new Expert Nailing
System resulted in a strong growth momentum, and the subsequent
launches across Europe of the remaining nails – namely the Expert
Humerus Nail, the Expert Retrograde/Antegrade Femoral Nail and the
Expert Lateral Femoral Nail – will enhance this development. Additional
new products will support our position in the subsegment of intramedullary
nailing: the Reamer-Irrigator-Aspirator (RIA), the ModAD aiming
device and the antibiotic coatings for the tibia nail are all in the
process of being launched.
11

Business Reports. Asia Pacific
The Asia Pacific region consists of numerous
heterogenous markets of which each
demands particular attention and tailored solutions.
Synthes’ efforts in addressing issues
individually have already yielded positive results –
particularly in Japan where we now are the
strong number two in Trauma.
Cervical Spine Screw
12

Synthes. Annual Report 2006
Business Report. Asia Pacific
2006 was a challenging but successful year for business in Asia Pacific.
In this region management is confronted with a very heterogeneous
group of countries and has to address a number of diverse issues
related to the special characteristics of the individual markets.
Throughout the region Synthes invested heavily in educational programs
for surgeons, OR-personnel, and its own sales forces. Together
with the AO, we offered more than 30% additional training days
to surgeons compared to the previous year. Additionally, we installed
training teams in dedicated facilities currently located in Japan, China
and at the regional headquarters in Australia. Despite decreased
prices in Japan and no price increases across the rest of the region,
Synthes achieved a local currency growth rate of 14.1%. However,
foreign currency loss of 2.7% negatively impacted the positive results.
Japan – strong growth despite imposed price reductions
Japan accounts for more than 50% of the region’s sales and contributes
an even higher percentage to profits. In 2006, the market
was affected by government intervention with the tightening of regulatory
requirements for product introductions and the reduction of
reimbursement for orthopedic products, particularly in the trauma business.
Despite a price reduction of more than 4% for trauma products,
we achieved a double-digit increase in revenues in this sector
due to an excellent growth in volume. Synthes now holds a firm number
two position in the Trauma segment with a market share of more
than 20%.
Synthes also achieved very strong results in Cranio-maxillofacial and
even stronger ones in Spine, substantially outperforming the Japanese
market in both segments. Nevertheless, the market shares in CMF
and Spine remain far below the average Synthes enjoys in the rest of
the world. A lot of work therefore remains to be done to achieve the
growth potential in these market segments. The Japanese version of
the Proximal Femur Nail (PFNA) is the first product especially designed
to cater for the specific geometry of an Asian femur. The concept has
been very well received by surgeons in the region and it will launch
in the first quarter of 2007.
products that generated sales in 2006. The Locking Compression
Plate (LCP) system, which has become the established standard treatment
for fractures of osteoporotic bone or complex fractures, and
spinal products such as Pangea (a pedicle screw system), SynFix-LR
and Vectra (a dynamic cervical plate) have been significantly contributing
to growth since their launch during the course of the year.
China, India and other Asian countries –
long-term investments and educational efforts
In terms of operative treatment of fractures and spinal diseases, China
and India are still underdeveloped. But both are overpopulated
countries with an enormous long-term growth reservoir. The major
challenge in these areas is to establish a broad acceptance for our
high quality products and for the AO philosophy of bone fracture
management. Synthes has its own offices and sales forces in these
two countries as well as in Indonesia, Korea and Taiwan. In all other
Asian countries Synthes is represented by distributors.
It will require strong educational efforts to establish our organization
in those countries. We are confident that the manifold educational
activities of the AO Foundation will help us achieve this goal. Investing
in the development of these markets is a long-term endeavor. We
are positive that our undertakings will not only strengthen our leading
position as a foreign provider of outstanding orthopedic implants,
but also support the emergence of an improved healthcare system
for the benefit of patients, surgeons and the health authorities.
Australia, New Zealand, Hong Kong, Malaysia
and Singapore – successful launches
These five countries are in many ways comparable to North America
and Europe in factors such as the level of educational background,
the regulatory environment, and the availability of reimbursement for
healthcare services and medical devices. In all these countries Synthes
has a direct presence, with our own subsidiaries and dedicated
sales forces. Although the regulatory requirements are becoming
more stringent, we were successful in introducing a number of new
13

Business Reports. Latin America, Middle East and Africa
The market in Latin American, the Middle East
and Africa is steadily growing as fractures
are increasingly treated with operative methods.
Synthes’ operations in these regions reflect
this upward trend: the number of Latin American
subsidiaries was further increased and distributors
expanded their sales forces in Middle East
and Africa.
Titanium Elastic Nails
14

Synthes. Annual Report 2006
Business Report. Latin America, Middle East and Africa
During 2006, Latin America contributed the strongest growth performance
in the company, with a local currency growth rate in the high
twenties that was further supported by a foreign exchange gain. The
Latin American business accounted for more than 3.4% of overall corporate
revenues, compared to approximately 3.0% in 2005.
A new subsidiary in Costa Rica
Synthes owns subsidiaries in Argentina, Brazil, Colombia, Mexico, and
Peru, and added a sixth subsidiary by acquiring the existing distributor
in Costa Rica in late 2006. Operations were strengthened with the
establishment of additional Synthes offices in various cities in Brazil,
Mexico and Peru. The fact that Brazil and Colombia alone accounted
for more than 50% of all revenues in Latin America indicates that this
region still has great potential for future growth.
sections “AO Middle East” and “AOSpine Middle East” will help to
enforce our leadership in Trauma and further improve our market position
in the Spine and Cranio-maxillofacial segments. Indeed, the
performance of the two latter businesses was very positive in 2006;
they were the main contributors to the double-digit growth rate in
the region.
Expanded sales forces in MEA hold competition at bay
We further expanded our sales force in South Africa, the only directly
served country in the region, and successfully encouraged our distributors
in all other countries to increase the number of dedicated
sales personnel as well. Due to this strong presence our high quality
products and service strategy prevailed over numerous local and international
competitors.
The Locking Compression Plate (LCP) system remains the main growth
contributor for the Trauma business and most LCP product lines are
now available throughout the region. Many new LCP specialty plates
such as the Distal Femur Plate and the Compact Hand System were
introduced in 2006. In Spine, PEEK cages and biomaterials contributed
most significantly to growth. Our Cranio-maxillofacial business established
new fields of application, particularly in the neuro market
with the Patient Specific Implants and our unique VEPTR system, offering
customers unprecedented solutions.
During 2006 we substantially increased the penetration of LCP in MEA.
In Spine we experienced a high growth impact from the Universal
Spine System (USS II) and the pedicle screw system Click’X. Finally,
we were able to make customers aware that Synthes is also a significant
player in the Cranio-maxillofacial market, where we doubled our
sales in 2006 and started to promote the latest product systems which
up to now have only been available in highly developed markets.
Training as an important pillar of success
World-class training provided by Synthes and strong cooperation with
the regional AO organization are crucial for sustainable success. This
is true for all markets, but in Latin America, education and training
play an even greater role as more and more fractures are treated surgically.
Synthes has created a new training structure by increasing the
number of dedicated trainers to continually improve the specialized
knowledge of a continually growing sales force. For surgeons and ORpersonnel,
AO Latin America continues to offer an increasing number
of AO courses in all specialties.
Important AO activities in Middle East and Africa
As in Latin America, in the Middle East and Africa (MEA) the most
effective path to sustainable success is through consistent and medically
aligned education. In 2006 Synthes continued to give high priority
to the strengthening of its training and educational efforts in
the region.
Synthes is particularly grateful for the efforts of the AO Foundation
in establishing regional organizations in MEA for Trauma and Spine
and supports the AO’s endeavors in every way possible. The new AO
15

Business Reports. Poland
Poland is a growing market for medical devices,
and entry into the European Union in
2004 has considerably reinforced this trend.
Synthes seized the opportunity of expanding
into this newly emerging healthcare
market several years ago, and we have
been making excellent progress ever since.
Expert Humeral Nail
16

Synthes. Annual Report 2006
Emerging Markets. Poland
With roughly 37 million inhabitants, Poland is one of the larger European
economies. When the European Union was expanded eastward
in 2004, restrictions to trade with the new member state Poland
were relaxed, considerably increasing our sales opportunities in this
less-developed market for medical devices. Entry to the EU has proven
to be highly beneficial for the Polish healthcare sector, with positive
changes and developments in medical treatment patterns, the provision
of healthcare, and the availability of funding. These encouraging
trends are being reinforced by government initiatives to modernize
and rationalize the healthcare system and to increase the financial
resources in this sector by an average of 6–7% annually.
Synthes is in third place in the Polish market for spinal products. The
artificial discs Prodisc-L and Prodisc-C have been introduced, and high
surgeon interest in these new devices has resulted in growing sales.
Besides the Prodisc systems, sales growth in the Spine segment has
been driven by the cervical intervertebral spacer Cervios and the second
generation of the Universal Spine System (USSII).
In the Cranio-maxillofacial business, Synthes is the market leader in
Poland. Products generating strong sales include FlapFix for the fixation
of cranial bone flaps, the Compact MF System and our bone graft
substitute Norian.
The Polish orthopedic market is currently estimated at approximately
US$ 18 million, with annual growth rates in the teens. Synthes established
its own subsidiary in Poland in 2003 and has invested heavily
ever since to build a strong position in the growing Polish market.
Synthes increased its local sales force by almost 40% in 2006 alone.
Strategic positioning through high service levels
Pricing competition poses a key challenge in Poland, as local companies
with low-cost copies have a strong presence in the market. We
are striving to position ourselves as the company of choice in the Polish
orthopedic market by offering customers the best service level in
the industry. Synthes Poland operates with dedicated sales teams that
focus on specific market segments, with separate sales forces to call
on traumatology, spine and cranio-maxillofacial surgeons. This means
our customers can rely on Synthes representatives who have in-depth
knowledge of their specialty and its specific needs. As part of their
service, Synthes consultants spend around 25% of their time in the
operating theatre, ensuring that Synthes products are applied appropriately
and that the surgical procedures in the operating room go
smoothly. Comprehensive medical training activities complete our
outstanding service portfolio, as we organize and conduct on-site
training workshops for surgeons and OR-personnel in numerous local
hospitals on a regular basis.
Strong interest in innovative technologies
As the number two company in the trauma market, Synthes is competing
successfully with local and international competitors. Nailing
and plating techniques are equally popular among Polish surgeons.
Our Locking Compression Plate (LCP) system enjoys very high acceptance
and has substantially replaced the older methods of plating. In
the subsegment of intramedullary nailing, new products such as the
PFNA and the Expert Tibial Nail have been extremely well accepted
by the surgical community in Poland.
17

Product Highlights
MatrixNEURO Mesh Plate
18

Synthes. Annual Report 2006
Product Highlights
Trauma. Reamer-Irrigator-Aspirator | 20
Spine. SynFix-LR | 22
Cranio-maxillofacial. Patient Specific Implants | 24
19

Product Highlights. Trauma
Trauma. RIA – Reamer-Irrigator-Aspirator
Intramedullary nailing is one of the most successful treatment methods in trauma. This method requires the
expansion of the bone’s medullary canal by means of reaming. With RIA, Synthes provides a device
which makes the reaming procedure easier, faster and safer. As an added benefit, RIA can be used for harvesting
autologous bone.
Presently fractures of the long bones, particularly the femur and tibia,
are routinely treated by placing an intramedullary nail into the bone’s
medullary canal. The implant serves as a substitute load-bearing column
until healing occurs. Since the introduction of this technique by
Gerhard Küntscher in the 1940s, it has evolved to become one of the
most successful treatment methods in orthopedic trauma surgery. Intramedullary
nailing allows the quick remobilization of the patient.
This is important in avoiding the serious complications that were common
with the conservative management of fractures by means of
traction and prolonged bed rest.
Preparing the bone for implantation
However, despite the undoubted benefits of the procedure, a risk of
complications remains. The center of long bones is filled with fat
which can be displaced into the venous system when the nail is placed
into the canal. This problem can be compounded if the intramedullary
space needs to be increased in diameter to accommodate a larger,
stronger nail than could be placed in the patient’s natural canal. In
order to create a greater diameter inside the bone, the surgeon introduces
drills of increasing size until the canal has been expanded
sufficiently. This process is known as reaming.
Reaming produces pressure which forces marrow fat into the vascular
system. In most cases the consequent embolic debris is tolerated,
but it is known, on occasion, to provoke respiratory and cerebral complications
with adverse consequences ranging from mild lung problems
to, in extreme instances, death. The risk of such complications is
increased in polytrauma patients needing placement of multiple nails,
or patients with cancer who need a nail to prevent a tumor-weakened
bone from fracturing.
create a slurry of cut particles, and then vacuum it away. And, unlike
the inefficient original reaming systems, RIA increases the diameter
in one pass down the bone instead of requiring time-consuming multiple
passes and numerous exchanges of cutting heads. This saves
costly operating room time and provides an easier technique. And
because the cutting surfaces are constantly cooled by irrigation, the
complication of thermal damage to the bone is avoided.
New method for bone harvesting
Being able to enter the canal of the bone safely, without the risk of
complications, has resulted in an entirely novel application for RIA.
Often bone needs to be transplanted from one area, most commonly
the pelvis or iliac crest, to a place where bone is missing or will not
heal. This is known as autograft. Unfortunately, in some cases the
amount of bone needed for transplanting is not available from the
usual harvest sites. This presents a treatment quandary: how to find
the extra bone needed? RIA provides an answer by unlocking an entirely
new source of autograft – the rich reamings of the bone marrow
from the femur or tibia.
With RIA Synthes has once again proven its dedication to developing
solutions to important clinical problems. The pursuit of better treatments
is a sustaining mission and one that constantly yields new opportunities.
RIA is poised to open new areas of discovery that result
from this philosophy. But that is another story – one of many which
will undoubtedly result from this truly unique product.
Risks eliminated with RIA
Synthes has long been in pursuit of a solution to this complex but important
clinical dilemma. With RIA, the Reamer-Irrigator-Aspirator,
Synthes presents a new reaming device which allows surgeons to increase
the canal diameter of the bone without creating pressure,
thereby eliminating the risk of embolization. RIA creates a negative
pressure within the bone, enabling surgeons simultaneously to ream,
20

Synthes. Annual Report 2006
Patient story | The young man
was a belt-restrained back-seat passenger
involved in a motor vehicle
accident. He sustained life-threatening
injuries which included fractures
of femurs, a tibia and a forearm. Surgeons
at the University of Florida/Jacksonville
routinely use RIA and
it was ideally suited for management
of this severely injured patient.
Now, seven months after the injury,
his fractures are healed and he
has recovered.
Pre-operative
Post-operative
21

Product Highlights. Spine
Spine. SynFix-LR
SynFix-LR is an innovative device for the fusion of the lumbar spine. As this implant is inserted and fixated
from the front, the delicate back muscles are not affected and patients recover more rapidly. And because only
one surgical approach is necessary, the procedure is more efficient, saving time and costs.
It is well established that at least 8 out of 10 people experience a significant
and disabling episode of back pain at some stage in their life.
These episodes are likely to occur between the ages of 30 and 50,
the most productive period of most people's lives. As we get older,
certain biochemical and structural changes occur in our intervertebral
discs, which can cause pain. Symptoms generally settle spontaneously
within 6 to 12 weeks, but in some cases symptoms persist
and result in considerable limitations affecting work and recreational
and domestic activities.
Approximately one percent of this patient group with persistent and
debilitating pain undergoes surgery to relieve the symptoms. And of
these operated patients around 10 percent are found to have localized
mechanical pain or pain originating from the intervertebral disc
and subsequently undergo a spinal fusion. This involves removing the
pain-generating disc and placing a vertebral spacer between the adjacent
vertebral bodies. The affected segment is additionally fixated
by posterior pedicle screws combined with rods. This requires more
than one incision for accessing the spine from different angles (also
known as 360° fusion).
SynFix-LR stand-alone solution: single
approach from anterior only
Less invasive surgery – faster recovery
360° degree fusion: two approaches
from anterior and posterior
Since SynFix-LR is inserted anteriorly, the posterior muscular structures
are preserved and surgical morbidity associated with posteriorly
instrumented lumbar spine fusion surgery is eliminated. Additionally,
SynFix-LR does not have any overlaying profile on the anterior spinal
column. The postoperative risk of damaging vessels and soft tissue is
therefore eliminated. As a result, patients can be mobilized earlier
and leave hospital sooner, reducing expenses for the hospital stay.
Opening up new options in spinal fusion
Most implant devices require a posterior approach – that is, the surgical
procedure is performed from the back. Posterior approaches
involve cutting through lumbar muscles which are important in maintaining
an upright posture and supporting the spine during day-today
activities. The muscles can take a long time to recover, and the
disruption to their normal mechanics can lead to complications for
quite some time after the operation. Synthes has developed a device
that can be applied from the front (anteriorly) by means of a less invasive,
muscle-sparing approach. SynFix-LR consists of a radiolucent
cage and an integrated plate which is fixated with diverging locking
screws for superior stability and pull-out resistance. Together, the fixation
plate and the locking screws act as a tension band. Biomechanical
tests have demonstrated that SynFix-LR offers stability comparable
to that of a cage combined with posterior pedicle screws in flexion,
extension and lateral bending, and is superior in axial rotation.
SynFix-LR requires only a single anterior approach to restore the disc
height and lordotic angulation and fixate the implant. Moreover, Syn-
Fix-LR is a stand-alone device, so additional fixation devices for stabilizing
the affected spine segment are not necessary. Consequently,
surgery time is considerably shorter than in methods involving cages
applied in combination with pedicle screws and rods. Less time in the
operating theatre means a direct reduction of OR-related and staff
costs.
22

Synthes. Annual Report 2006
Patient story | This 32-year-old
Australian mother of two children
suffered from increasing back
and leg pain. At first, she opted for
conservative treatment, but after
a year she could no longer tolerate
the pain and the limitations to
her domestic activities. Still, she did
not like the idea of having ”nuts
and bolts” put in her back. When
she heard of the new SynFix-LR
device, she was so convinced that it
was the solution that she decided
to wait another 6 months until the
implant was available.
She was one of the first patients
worldwide to be treated with
SynFix-LR by Dr. C. Cain in Adelaide.
The surgery relieved her of her
back and leg pain almost immediately.
Today, over two years since she
underwent this life-changing surgery,
she can care for her family
without any physical limitations.
Pre-operative procedure to identify
disc damage
After treatment with SynFix-LR
23

Product Highlights. Cranio-maxillofacial.
Cranio-maxillofacial. Patient Specific Implants
In cranioplasty, a satisfying aesthetic result is essential. Synthes Patient Specific Implants are custom-designed
implants for the treatment of skull defects and deformities. Because the implants are derived from the patient’s
CT data, excellent reconstructive results are achieved.
Cranioplasty, the surgical repair of defects or deformities of the skull,
is a challenging field. Cranioplasties can treat a variety of conditions
ranging from head trauma to the removal of a tumor, with the goal
of achieving full functionality and acceptable cosmesis. The challenge
for craniofacial surgeons and neurosurgeons alike is to restore the
skull completely using an implantable material and a surgical technique
that minimize post-operative complications. Ideally, the material
should mimic the properties of craniofacial or cranial bone in terms
of strength, infection resistance and fracture resistance to name just
a few.
3-D model derived from CT scan data PSI custom made to fit defect
Previous solutions with drawbacks
There is currently a multitude of materials surgeons can choose from
for treating skull defects or deformities, including autogenous bone,
metals and alloplastics. Autogenous bone grafting, where the patient’s
own bone is used, has long been the standard in reconstructing the
craniofacial skeleton. However, this method is often associated with
significant resorption and is prone to high levels of infection. Metals,
mainly titanium and titanium alloys, offer high strength characteristics
relative to cranial bone and are unlikely to harbor infection, but
they are not easily contoured to match the patient’s anatomic features,
especially for larger defects. Alloplastics, or moldable plastics,
are popular for their adaptability, but they are prone to infection, cannot
always be molded easily for large defects, and give off tremendous
heat during the application process.
Innovative, custom-designed implant
With the introduction of Patient Specific Implants (PSI) Synthes offers
the solution to many of the challenges associated with cranioplasty.
PSIs are implants that are custom-designed for each patient and replace
bony voids in the cranial and craniofacial skeleton. Each implant
is designed using a 3D computer-aided design (CAD) model derived
from the patient’s CT scan and is approved by the surgeon prior to
production in order to ensure a high-quality final product. The featured
benefits of this product compared to the conventional treatment
options include a better anatomic fit and reduction in operating
time.
Synthes offers two biocompatible material options for PSIs, PEEK Optima-LT
and commercially pure titanium. Both are non-porous materials
and neither is known to harbor infection. PEEK Optima-LT has
bone-like properties in terms of strength and stiffness and is the material
of choice for Synthes surgeons. This lightweight plastic offers
no limitations in plating orientation or location and can, if necessary,
be modified in shape at the time of the surgical procedure. Implants
made from titanium have ultra-high strength as compared to cranial
and craniofacial bone. These metallic implants require predetermined
machine screw locations for the attachment of plates and cannot be
modified intraoperatively.
A strong solution for aesthetic results
One of the main advantages of these custom implants is that they
achieve the intended corrective result while minimizing operating
time. Moreover, post-operative complications are reduced and even
prevented by using proven biocompatible materials such as PEEK and
titanium. Together, these benefits make PSIs a strong solution: they
reduce medical costs, facilitate a rapid recovery, and – most importantly
– fully restore the patient’s anatomical cosmesis and functionality.
24

Synthes. Annual Report 2006
Patient story | Diagnosed with an
intracranial tumor, this 42-yearold
man decided to have it surgically
removed. The surgeon resected
the tumor, replaced the native bone
flap and fixated it with plates
and screws. Due to intracranial swelling,
the patient suffered from a
seizure two years later and the bone
flap and hardware were permanently
explanted. During his recovery,
the CT scan was evaluated for a
Synthes Patient Specific Implant. Later
that year, the patient had a cranio-
plasty in which a PSI made of PEEK
was implanted. Extremely happy
with the result, he has healed well and
is back to normal everyday life.
After removal of native bone flap
2 months after treatment
25

Sustainability
Reduction Foreceps
26

Synthes. Annual Report 2006
Sustainability
Health, Safety and Environment | 29
Employees | 31
Outlook | 33
27

Sustainability. Health, Safety and Environment
Quality management is a top priority at Synthes.
We proactively implement measures to improve workplace
safety and ensure the health of our employees.
We also monitor our environmental performance
and consistently strive to conserve resources and
reduce waste.
Humerus Block
28

Synthes. Annual Report 2006
Sustainability. Health, Safety and Environment
As a manufacturer of medical devices we are required to comply with
a number of environmental and safety legislations set out by the countries
in which we operate. In the USA, Synthes continues to strive to
exceed all USA Occupational Health and Safety Administration (OSHA)
and Environmental Protection Agency (EPA) requirements through
best-practice policies for maintaining the safety of all employees
and for protecting the environment. In Europe we comply with ISO
9001:2000 and ISO 13485:2003 for quality management and ISO
14001:2004 for safety and environmental issues.
Preventive measures and training
programs for workplace safety
Synthes is totally committed to providing a safe working environment
in the interest of the health of its employees. We provide numerous
tools to assist in manual tasks with respect to weight, danger of injury
and repetitiveness of tasks, and in handling hazardous materials.
All our machines for milling, drilling or grinding are properly secured
in order to prevent any kind of misuse that might endanger health.
All these measures are complemented by a variety of regularly scheduled
safety training programs which are mandatory for all affected
employees. In all our production plants we provide the equipment
necessary to protect our employees from excessive noise levels, vibrating
tools or chippings which could imperil their eyes or other organs.
Finally, all types of adverse incidents are reported and tracked,
providing a system for continuous improvement of health and safety
measures at each workplace at Synthes.
Commitment to minimizing environmental impact
Synthes continuously assesses the environmental impact of its operations.
During the construction of the new headquarters in West Chester,
Pennsylvania, for example, we paid special attention to energy
efficiency and waste reduction by utilizing environmentally-friendly
equipment and fixtures. We will also consider further ecological issues
when planning the construction of the new office building in
Solothurn, Switzerland, and the expansion of our manufacturing facilities
in Raron, Switzerland.
Given the nature of our manufacturing processes, we are fortunate
that our operations have minimal impact on the environment. Nevertheless,
we are committed to continuously improving our environmental
performance by ensuring that we use fewer resources and
produce less waste while manufacturing more and more products.
Whenever possible, we reduce the number of chemicals involved in
our processes, and select the most environmentally-friendly and least
harmful products for the benefit of our employees and the environment.
In addition, we seek to reduce pollution and emissions by optimizing
the use of raw materials and other supplies, such as cooling
liquids and lubrication solvents, and, where possible, utilizing biodegradable
materials.
29

Sustainability. Employees
Our success and strength depends on the quality
and commitment of our employees. We strive to be
the employer of choice, to attract and retain the
best people in all areas of operation. At Synthes employees
can pursue a career full of potential by
taking on challenging tasks, accepting international
assignments and participating in numerous training
opportunities.
Screw Rack with LCP Locking Screws
30

Synthes. Annual Report 2006
Sustainability. Employees
In 2006 Synthes continued its successful development and created
824 new jobs across the globe, mainly in production and sales. As a
growing company we rely on recruiting new employees through various
channels. For example, in the United States we successfully run
a cooperative program with Drexel University in Philadelphia. Students
from this college spend six months working at Synthes as part
of their credit hours towards their engineering degree. The students
profit from gaining practical experiences in the field of product development,
and Synthes has been able to attract highly talented students
who on occasions have accepted full time positions upon the
completion of their degree.
Performance Management System
Synthes has introduced a Performance Management System geared
towards the company’s various peer groups. Peer groups are organizational
groups whose tasks and goals are comparable. With the new
Performance Management System employees go through an appraisal
review process that covers the performance features and assessment
criteria characteristic for their particular peer group. In this way,
the strengths and areas for development identified during the appraisal
review can result in a stronger contribution to the overall performance
of each individual peer group.
change characteristic of a rapidly growing and highly innovative company.
We are fortunate to be able to count on employees who exhibit
great dedication and motivation and who are prepared to continuously
develop and acquire additional skills to excel in new situations
and challenges.
Following the merger and standardization of our initial training and
continuing training program, we further optimized and expanded the
training portfolio in 2006. The basis for this work was partly the performance
management findings, and partly the needs identified from
current change management processes and operative requirements.
One of the major highlights was the design and introduction of a special
training course for our product development process. Highly Synthes-specific
specialist training courses in the field of product engineering
and production were developed on a global level with experts
from the USA and Europe. In this way, we ensure that Synthes employees
around the world are receiving the same practically-oriented
training content.
Corporate Compliance Program
Synthes is dedicated to maintaining the highest levels of professional
and ethical standards in the industry. To support our efforts we have
continued the development of our global corporate compliance program.
Our compliance program is overseen by the Audit Committee
of the Board of Directors, is lead by the Chief Compliance Officer, and
is supported by management and staff across the company. The program
is structured to satisfy government and industry standards,
while providing the Board of Directors with effective mechanisms to
monitor and address the legal and ethical compliance of our business
operations. To achieve these goals, the program strives to ensure that
our employees and business partners receive appropriate and clear
guidance and instruction on our policies and practices regarding legal
and ethical compliance. Moreover, we implement measures to prevent
and address any misconduct, and any waste or abuse of our assets,
as well as to foster a consistent culture of ethics and compliance
across the company. In doing so, we strive to strengthen our business
operations, to enhance our reputation for integrity, and to minimize
the risks and costs associated with unethical or illegal conduct.
Continuous training and development
We believe as an employer we have the responsibility of supporting
our employees in dealing with the demanding climate of constant
31

Sustainability. Outlook
For the coming year Synthes’ main objectives are
to maintain and increase market shares across
the globe and achieve double-digit sales growth in
the teens. We are confident that with our full
product pipeline we are well prepared to advance
the company’s sustainable development in the
long term.
Cable System
32

Synthes. Annual Report 2006
Sustainability. Outlook
Never in its history has Synthes achieved less than 10% organic sales
growth. We do not expect 2007 to be any different.
Focus on high potential products
Many demanding tasks lie ahead in the different business areas. Trauma
North America currently has a full and exciting product pipeline.
Some of these products, which mostly build on core concepts such
as the Locking Compression Plate (LCP) system, will be introduced to
the market in 2007, while others will continue to mature during the
course of the year. We will strive to maintain our leading market position
in Trauma, and see room to further increase our market share
in the subsegment of intramedullary nailing as well as in the field of
specialty LCP plates.
Our Spine division will focus on the successful continuation of the
Prodisc-L introduction in the US, which will depend highly on achieving
excellent clinical outcomes as well as on the relaxation of the tight
reimbursement policies for this type of device. In addition, we will
work diligently to obtain a timely premarket approval (PMA) from the
FDA for our cervical artificial disc, the Prodisc-C. With these products
and many other innovative devices in virtually every product category,
we are confident that we will maintain or increase share in the various
segments of the spine market.
Potential for increasing market shares
In Europe, Synthes has already benefited from being able to operate
uniformly in all its markets. In countries where we assumed responsibilities
from Mathys three years ago, we have subsequently established
qualified and specialized sales forces. However, our market
shares in these countries, particularly in the areas of Spine and Craniomaxillofacial,
do not yet compare to those in countries in which Synthes
has been active for a longer period of time. Thus, we expect to
see further momentum for improvement of market share as well as
a per capita productivity increase in these newer European markets.
In Central and Eastern Europe, where we started from a very low base
a few years ago, we are experiencing growth rates that are well above
average, and expect this development to continue in 2007.
prices by generating even more volume growth. Despite some uncertain
external factors, we are confident that we will continue our competitive
pace in these markets with our current product offering. In
addition, the new product approval pipelines look strong, particularly
for spinal implants. We see definite potential for increasing our
share in the Spine and Cranio-maxillofacial markets across the entire
region. We also believe there is a great deal of potential for further
expanding our position in the Trauma business segment. Educational
activities throughout Asia Pacific will continue to be a top priority:
we currently have dedicated training facilities in Japan, China and at
our headquarters in Australia, and we plan to establish a further training
center in India during the coming year.
As for the rest of world, we expect the successful performances in
Latin America and in the Middle East and Africa to continue. Both
these regions offer solid volume growth potential for 2007. We also
believe it is important to continue to expand our sales force presence
and increase our training activities in these regions, often in cooperation
with the AO Foundation.
Focus on sustainable growth
Synthes’ primary goal is to maintain a low double-digit sales growth
rate; we strongly believe that this approach is the best way to ensure
the company’s overall profitability in the long run. That said, we continue
to search for ways to increase our manufacturing efficiency and
leverage our operation in terms of size, as well as making the most
of the manifold investments we have made in the past to guarantee
future sales growth and profitability for our shareholders.
In the Asia Pacific region we are continuing to see more government
intervention in both pricing and regulatory requirements. In some
countries such as India, regulatory systems are in the process of being
introduced. In others, including Australia and New Zealand, the
governments are requesting evidence-based clinical data to justify the
approval or reimbursement of new medical devices. Price reductions
for trauma products in Japan will continue. It will require a special effort
from our sales teams to compensate for lower average selling
33

This annual report is published in English and in
German. The original language is English.
Concept and design
Synthes, Marketing Services & Communications
Oberdorf, Switzerland
Synthes, Investor Relations
Solothurn, Switzerland
Ute Drewes, Visuelle Gestaltung und Illustration
Basel, Switzerland
Photography
Synthes, Material Science & Testing
Oberdorf, Switzerland
Ute Drewes, Visuelle Gestaltung und Illustration
Basel, Switzerland
Lithography
Synthes, Marketing Services & Communications
Oberdorf, Switzerland
Desktop publishing
Ute Drewes, Visuelle Gestaltung und Illustration
Basel, Switzerland
Printed by
Druckerei Lüdin AG
Liestal, Switzerland
Products of Synthes, Inc. are covered by numerous
trademark registration in various jurisdictions
and by nearly 200 patents worldwide. Synthes is a
registered trademark.

USA and Canada
Synthes, Inc.
1302 Wrights Lane East
West Chester, PA 19380
USA
Tel. +1 610 719 5000
US Customer Service (toll free):
Tel. +1 800 523 0322
Europe, Middle East and Africa
Synthes GmbH
Glutz-Blotzheim-Strasse 3
4500 Solothurn
Switzerland
Tel. +41 32 720 40 60
Fax +41 32 720 40 61
ir.info@synthes.com
Asia Pacific
Synthes Asia Pacific
Suite 1a
Building 3, Level 3
20 Bridge Street
Pymble, NSW 2073
Australia
Tel. +61 2 9449 0400
Fax +61 2 9449 0499
www.synthes.com
Latin America
Synthes LAT, Inc.
703 N.W. 62nd Ave.
Suite 550
Miami, FL 33126
USA
Tel. +1 305 341 1022
Fax +1 305 341 1028
synthes.lat@synthes.com
035.000.162 1/07 © Synthes, Inc. Printed in Switzerland