Conquering Catastrophe The historic 9.0-magnitude earthquake off Japan’s northeastern coast

Conquering Catastrophe

The historic 9.0-magnitude earthquake off Japan’s northeastern coast on March 11 spawned a deadly tsunami that wiped out whole villages and precipitated the world’s worst nuclear accident in nearly a quarter century. Medical device firms feared the disaster would be as lethal to their supply chains as it was to the automotive and consumer electronics industries. Auto giants such as Ford Motor Co., Toyota Motor Corp. and General Motors Co. initiated a frantic (but albeit fruitless) search for Xirallic after the Japanese factory that makes the pearl-luster pigment closed for repairs for two months. The temporary suspension in production forced many car dealers to limit the number of colors offered to consumers. Apple ran into a similar snag with the lithium-polymer batteries used in its iPod line. The batteries contain a polyvinylidene fluoride polymer made by Kureha Corporation of Tokyo, Japan (the company held a 70 percent market share on the polymer at the time of the quake). Though Kureha’s facility in Iwaki escaped the disasters relatively unscathed, extensive damage to a nearby port prevented deliveries of the materials necessary to manufacture the iPod battery polymer.

The device industry generally fared much better in the disaster, thanks to effective planning and, well, good luck. Few firms sustained damage to their Japanese facilities and only a handful of suppliers were forced to temporarily close up shop. Fortunately, many of the companies affected by the supply chain snafu had either enough raw materials on hand to meet local demand (such as Covidien plc) or adequate inventory levels to keep up with customer requests (Becton Dickinson and Company). Unlike auto makers, medical device manufacturers rarely rely on just one or two suppliers for key components or materials; such foresight helped them avoid a massive and costly supply chain disruption.

That foresight also helped device firms sidestep a potential earnings fiasco. After the double disaster struck in March, most medical device executives expected their Japanese or Asia-Pacific sales and revenue figures to fall dramatically in the second quarter (ended June 30). Industry analysts sounded the alarm for orthopedic firms in particular, warning that semi-elective surgeries such as hip and knee implants would be most vulnerable to a decline in demand.

Those declines never occurred, though (if they did, they were not significant enough to impact earnings). Companies such as Stryker Corp., Zimmer Holdings Inc. and Synthes Inc. reported healthy sales and revenue from their Japanese operations in the second quarter; during an earnings conference call in mid-July, Stryker CEO Stephen MacMillan called Japan one of the “bigger upside surprises” in the quarter.

Japan also was one of the top-grossing regions for Zimmer, which reported 6.9 percent overall sales growth in the Asia-Pacific region during Q2. Sales of reconstructive products in that market grew 4 percent on a constant currency basis, while knee sales climbed 2 percent and hip sales jumped 7 percent.

Synthes posted perhaps the most impressive gains in the Asia-Pacific region, generating $257.1 million in sales during the first half of 2011, a 27.4 percent increase (16.2 percent on a constant currency basis) compared with the $201.8 million theregion generated in the first half of 2010.