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Carl Zeiss Meditec:A Legacy of Innovation
The company has developed practice-transforming technologies.
BY JERRY HELZNER, SENIOR EDITOR

Jim Taylor, president and CEO of Carl Zeiss Meditec, Inc., with the company's recently launched Visante OCT anterior segment imaging system.

In fiscal 2005, Carl Zeiss Meditec (CZM) increased its sales 37.6% and saw earnings before interest and taxes (EBIT) rise 39% on a year-over year basis. Results remained strong in the first half of fiscal 2006, with sales ahead by 34.4% over the previous year and EBIT up a healthy 40.7%. Though sales figures were helped by acquisitions, CZM's bottom-line growth rivals even the fastest-growing high-technology companies. What makes the achievement all the more impressive is that CZM has shown an ability to bring practice-transforming applications such as Stratus OCT imaging and IOLMaster biometry to what many would consider an already relatively mature marketplace.

How can such success be explained?

First, combine a 160-year history of excellence in optics with a corporate environment that fosters internal innovation while also pursuing a bold and carefully planned acquisition strategy. Add in a global sales presence, strongly positive demographic trends provided by aging baby boomers, and the ability to expand into new market segments that offer above-average growth opportunities. Taken together, these are the key factors that are driving the company's rapid growth.

This article will examine the elements that constitute the Carl Zeiss Meditec story, from the company's founding as a small shop making microscopes in Germany in 1846, to its present-day status as a leading provider of diagnostic and therapeutic solutions to eyecare professionals with total sales of more than $400 million in fiscal 2005.

A Pioneer in Optics

It should not be surprising that CZM places such a high priority on innovation. The company's founder, Carl Fredrich Zeiss, broke ranks with the traditional lens makers of his era to employ scientific methods and the physics of optics to create instruments that were soon praised throughout Europe's scientific community for their quality.

From simple microscopes, Zeiss and his partner Ernst Abbe, a professor of physics and mathematics, progressed to compound microscopes, binoculars and spectacle lenses. It was their pioneering work that provided a strong foundation for the development of a wide range of Zeiss products, such as high-quality camera lenses, that made the "Zeiss" name synonymous with technological superiority in optics.

In eye care, the company was quick to establish its reputation for superior spectacle lenses and was first to develop prescription lenses, a great leap forward in improving the quality of vision for spectacle wearers.

Fast forward to the 1990s when Carl Zeiss looked ahead to an increasingly aging world population and made the strategic decision to place a higher priority on developing and expanding its eyecare business. The acquisition of Humphrey Instruments in 1991 was followed by a combination with Ascepion-Meditec in 2002, leading directly to the formation of Carl Zeiss Meditec AG and its spin-off from Carl Zeiss as an independent, publicly traded company (German Stock Exchange) in that same year. In Carl Zeiss Meditec, a forward-looking management brought together the optical leadership of Zeiss, the perimetry leadership of Humphrey and the laser expertise of Ascepion-Meditec in a single entity. The company had the ability to provide a wide range of eyecare capabilities in diagnosis, treatment and follow-up.

In the past 2 years, Carl Zeiss Meditec has further broadened its portfolio by acquiring IOLTech, a French-based company best known for its IOLs and associated cataract surgery and refractive products, and Laser Diagnostic Technologies, a pioneer in glaucoma detection with its GDx technology and Variable Cornea Compensation (VCC) enhancement, which measures changes in the tissue characteristics of the retinal nerve fiber layer.

Along with these acquisitions, CZM has continued to develop new and improved products internally, allocating approximately 10% of overall revenues to R&D. This impressive commitment to R&D has resulted in the recent launch of the Visante OCT, which expands the company's expertise in optical coherence tomography to anterior segment applications, and the Visucam Pro NM non-mydriatic fundus camera, which the company says provides the most advanced fundus imaging available to document retinal pathology. CZM has also introduced enhanced software diagnostics for its Humphrey Field Analyzer (HFA) line of perimetry systems.

Synergistically Structured

The Stratus OCT offers several key imaging applications.

Though it is now an independent, eyecare-focused company, CZM still has strong ties to the overall Carl Zeiss Group, including in the areas of basic R&D, technology development, shared distribution in smaller markets and the sourcing of certain optical components and assemblies. In addition, CZM shares in the leveraging of the valuable "Zeiss" brand and participates in Carl Zeiss Group forums designed to assist the operating companies in strategic planning and "best practice" development. CZM's majority shareholder is Carl Zeiss AG, which owns roughly 65% of the outstanding CZM shares.

Carl Zeiss Meditec itself is structured with a parent company, Carl Zeiss Meditec AG, headquartered in Jena, Germany, and four operating companies. The operating company serving the U.S. market is Carl Zeiss Meditec, Inc., which is based in Dublin, Calif., and headed by Jim Taylor, a 1970 graduate of the U.S. Naval Academy with more than 25 years of experience in the medical device and technology industries. Taylor also serves on the Management Board of Carl Zeiss Meditec, AG, with primary oversight of global strategy, marketing and technology development.

As president and CEO of Carl Zeiss Meditec, Inc., Taylor has the responsibility for a large North American market with strong growth potential. This market currently accounts for a significant percentage of CZM's total worldwide sales. In addition, more than 500 of all Carl Zeiss Meditec's employees work in the United States.

Taylor points to the fact that CZM has been able to successfully combine Zeiss tradition with forward-looking scientific and business initiatives to create a company that can look back with pride and ahead with anticipation of even greater technological advancements to come. Taylor recently agreed to answer a series of questions from Ophthalmology Management. Following is that "Q & A."

Q. How would you characterize the qualities and expertise that have enabled Carl Zeiss Meditec to become such a force in innovating new diagnostic instruments for ophthalmologists? Is some of the company's success attributable to being forward-looking enough to make the right acquisitions at the right time?

The IOLMaster provides accurate non-contact biometry

A. To some degree, the answer could be as simple as the observation that a company with a heritage of excellence in optics and visualization is ideally suited to looking into the optical window for mankind, and there is probably some truth to that thought. It is also true because Zeiss is a company focused on innovation and committed to finding solutions to real problems or needs rather than simply pursuing innovation for innovation's sake alone.

In that regard, we must maintain close contacts with a wide range of customers, listen actively to what they tell us and, at times, take a long view on what investments to pursue. We are also blessed to have many employees who care passionately about our business and who have the experience and perspective to identify opportunities early in the game.

While acquisitions have been a part of the equation, they are not typically very cost-effective as the primary engine for innovation and growth.

Q. Which Carl Zeiss Meditec instruments does the company believe have made the greatest impact in how ophthalmologists now diagnose and approach diseases and specific procedures?

A. This question is somewhat akin to asking who was the better golfer, Jack Nicklaus or Bobby Jones? The answer is impossible due to the lack of direct contemporaneous comparison.

Certainly in this era, the IOLMaster is emerging as an indispensable tool for accurate biometry, and we only expect that recognition to strengthen as the newer IOLs become more commonly employed. In retinal diagnoses, evaluations without an OCT are rapidly becoming as incongruent as obstetrics without ultrasound. It is clearly becoming a standard of care, similar to our Humphrey Field Analyzer which has for over 20 years remained a gold standard product for glaucoma diagnosis and monitoring.

Q. Does Carl Zeiss Meditec have a stated Mission Statement and/or Vision Statement? If so, what would these be?

A. The Mission is best understood within the context of the overall Carl Zeiss Group Mission and Vision, so I will start with those.

The Core Purpose of Zeiss is: "Enabling science and technology to go beyond what man can see."

Within this context, the Mission for CZM has been "To provide innovative products and services that enable our customers to preserve and enhance vision."

Our Vision has been that "Every person should have the opportunity for perfect vision throughout their lifetime." With the intended acquisition and integration of the Carl Zeiss Surgical business, we will be expanding those statements with the context being that we are focused on enabling our customers to preserve and enhance the quality of life for their patients, with particular focus on preservation of vision, mobility and cognitive abilities.

Q. How does the company view the demographics of an aging worldwide population as impacting growth initiatives and specific areas in which the company might focus (i.e., aging diseases such as cataract, glaucoma and macular degeneration)?

A. In the ophthalmic arena, the global population demographics and economics are strong drivers of our business. In most developed regions, population aging and the associated need to preserve quality and productivity of life result in a high priority for vision care.

Glaucoma and cataract diagnostics and therapies have long been areas of focus for the business, but the rapid emergence of AMD and other age-related conditions has resulted in a significant expansion of the technology and product portfolio. For example, CZM's revolutionary imaging system, Stratus OCT, is becoming a standard of care for a wide array of applications. The economic emergence of major population regions (India, China) is another global shift that will shape and drive demand and growth opportunities. These factors are also having major impacts in arenas outside of ophthalmology, and this is one of the motivations for the recent announcement to merge (through acquisition) the Carl Zeiss Surgical business into CZM. Starting as the leader in operating room microscopes and visualization systems, this move will provide CZM with a strong platform in fields such as neurosurgery, ear, nose and throat (ENT) and spine surgery that will enable further diversification and growth, while also consolidating our ophthalmic surgical businesses under one legal entity and management structure.

Q. As you noted, Carl Zeiss Meditec is diversifying a bit into Neuro-ENT. Does this mean that the company believes that future growth opportunities in ophthalmology are limited, or is this a natural extension of the company's expertise? What percentage of overall revenues are expected to come form Neuro-ENT?

A. The planned diversification is actually a combination of businesses that have previously existed within the Zeiss portfolio. The decision to merge these entities within CZM reflects our belief that they are complementary in many ways, and that both arenas hold strong growth potentials.

In no way does this reflect a lessened priority in the ophthalmic space. Once combined, Neuro-ENT will account for roughly 15%-20% of our total revenues. More importantly, the businesses share many overlapping interests, competencies and challenges that will be more effectively addressed through an integrated approach.

For example, visualization technologies, image storage and analysis, and networking standards and protocols have nearly identical requirements across the relevant product range. Customer care and support infrastructure needs are the same, and the broader business scope enables more comprehensive and elegant solutions. Future trends in micro-computing, nanotechnologies, biomaterials, gene therapies and the like can be tracked and analyzed from a more well-resourced organization.

Q. One CZM goal is to significantly increase worldwide market share from 18% currently. How will that be accomplished?

A. We have not to date published specific market share targets, and the nature of our business would make general market share goals difficult to usefully establish. However, our growth objectives will inherently require both share growth as well as market expansion and/or diversification.

With the potentials that are emerging throughout the markets we address, it is anticipated that consolidation in certain sectors will naturally occur, and CZM is well positioned to play an active role. In addition, we see numerous opportunities to leverage the position held in certain technologies as enabling or symbiotic with new or existing clinical applications. For example, our OCT systems are being used to define endpoints in pharmaceutical trials, to serve as patient selection diagnostics prior to cataract or refractive surgeries and to help titrate pharmaceutical interventions for AMD. All of these sorts of applications hold the potential to lead to more integrated clinical solutions and business potentials for CZM, either as a primary provider or in cooperation with other industry partners.

Q. Does the company have any targets for annual sales and earnings percentage growth going forward? If so, what goals has the company set in this regard?

A. CZM has publicly stated that the goals are to outperform the market growth in our served markets, and to achieve EBIT margins at or above 15% by 2008. With that said, profitable growth is a major strategic focus for the organization.

Q. Why are the acquisitions of Laser Diagnostics and IOLTech complementary to the rest of the Carl Zeiss Meditec portfolio? Are these acquisitions working out as anticipated? Are they accretive to profits yet?

A. Both of these acquisitions have been accretive financially, and have served to enhance the strategic position of the business. For example, the LDT product provides an excellent glaucoma diagnostic tool that complements our OCT and perimetry product lines.

We are now better positioned to meet the specific needs of a broad spectrum of clinical practices and to provide them with the capabilities and economic alternatives that best suit their patient volumes, practice patterns and demographics. Simply put, we can focus on their needs rather than on what we have to sell.

In the other instance, IOLTech provides a platform business in the cataract and refractive space that can leverage the existing Zeiss diagnostics while opening additional growth and innovation opportunities. We are already seeing the benefits of integration into the Zeiss global distribution network and the leverage of the brand and associated customer relationships, and we are learning from the experience and know how of the people that have joined our organization from IOLTech. We are now also applying our expertise in optics to enhance the product pipeline for new lens design.

Q. Which recently launched products hold the most potential for future growth?

A. In the cataract and refractive arena, we are rapidly entering a time where outcomes must meet or exceed rapidly escalating patient expectations. "Good enough" will no longer be good enough.

In this environment, the CZM diagnostics platforms, including IOLMaster and the new Visante anterior segment OCT offer our customers the most advanced biometric measurement capabilities for pre- and post-surgical applications. We have already seen exceptional growth in this segment, and the future trends appear even more attractive.

In refractive lasers, CZM is nearing completion of the first segment of FDA clinicals on our advanced excimer platform, the MEL 80, and we are also now entering clinical testing for a next generation femtosecond laser platform which holds immense promise.

In the retina and glaucoma segments, we have experienced unprecedented growth from the market adoption of OCT imaging technologies (the Stratus OCT), and we see complementary growth trends in the related products such as the new non-mydriatic fundus camera (Visucam Pro NM), the GDx glaucoma diagnostic platform and also enhanced software diagnostics for the HFA line of perimetry systems. Finally, the IOLTech business opens a new sector for CZM, and we are excited about the opportunities to bring the optical design competencies of Zeiss into this arena.

Q. What products currently under development hold the most potential?

A. As noted, we continue to pursue advancements across the scope of the existing product platforms, with software applications offering additional and significant potentials to increase both effectiveness and efficiencies for the clinician.

OCT applications are at an early stage of evolution and we fully expect to leverage the technology as well as the expertise and advice we gain from working closely with the clinical and research communities. Along that same vein, integration of data from numerous modalities is becoming even more important in early detection, diagnosis and management of disease, and CZM is uniquely positioned to pursue those potentials.

Q. Which subspecialty areas of ophthalmology has the company targeted as holding the greatest potential for future growth? Is retina high on the list?

A. With the evolving confluence of cataract and refractive procedures and technologies, and with the impending baby boom impact, that sector is clearly poised for future growth. However, the aging populations and the emerging economies also promise ongoing strong growth in the areas of glaucoma and retinal applications, so CZM will continue to be broadly focused.

Q. Are there any geographic areas of the world in which Carl Zeiss Meditec sees exceptional opportunities to expand? For example, China, Eastern Europe, or other emerging markets?

A. CZM's product portfolio is diverse, and geographic growth potentials are in many cases dependent on the specific business sector being addressed. However, the emergence of significant market potentials in India and China are clearly providing significant growth potentials across the product range.

Toward that end, CZM and the Carl Zeiss Group at large have made major efforts to develop foundations for growth in these regions. In our ophthalmic business, Zeiss has been a major sponsor of the Vision 2020 initiative. This has not only allowed us to positively contribute to the advancement of eye care in the developing world, but has also helped to build relationships and a market presence that can be leveraged for the future benefit of the patients, the clinical communities and Zeiss. Around the world, the Zeiss brand, the established infrastructure and the breadth of the product range all create significant growth potentials.

Q. In what ways does the company develop relationships with ophthalmologists so that Carl Zeiss Meditec can anticipate and meet their needs?

A. The history of the company stretches back more than 150 years, and our relationships with the clinical community are broad and deep. With that said, we recognize the need to continuously develop, nurture or extend these relationships to ensure that we clearly understand the needs and priorities of our customers.

We are working to enable them to confidently enhance the care they provide to their patients, and we have a wide range of venues for that to occur, including basic research, clinical trials, formal and informal advisory boards, and the participation in numerous associations and societies around the world. It is true that we can never seem to do enough, but our efforts provide us with critically important guidance for our immediate and long-term priorities. These relationships and the inherent trust behind them are one of our most valued assets.

Q. How does Carl Zeiss Meditec differentiate in its product development and marketing approaches for ophthalmology and optometry?

A. As you are aware, clinical practices throughout the world do not break down easily into the clinical specialties or segments. Clearly, there are products and technologies that most directly serve one or another segment, but our development and marketing approaches do not differ appreciably as a result.

Our belief is that technology investment should be guided first by the premise that we can significantly improve outcomes or reduce costs to the benefit of the patients and the healthcare community at large. We intentionally avoid pursuit of products that merely serve to replicate those offered by other companies or those that offer no real benefit to the patient. And our marketing attempts more to inform or to educate rather than to "sell," so that approach is consistent, whether in ophthalmology or optometry.

Q. Where do you see Carl Zeiss Meditec 3 to 5 years from now in terms of the company's overall place in the ophthalmology-related marketplace? In other words, where is ophthalmology headed and how does the company intend to stay in the forefront?

A. CZM has not only a unique heritage, but also has an established and unique position within the ophthalmic market. We are generally recognized as the leader in advanced diagnostics and in sophisticated optical technologies, but the scope and competencies of the company now extend well beyond those characterizations.

As noted earlier, the ophthalmic market is undergoing dynamic change, and our past accomplishments are not a guarantee of future success. However, we believe that the values and focus that have made Zeiss a respected brand will continue to be to the benefit of CZM in the years ahead. Innovation, technical excellence, precision and quality are all typical associations tied to the brand of Zeiss.

We expect that the market will undergo substantial change, not only in size but also in composition. We expect that consolidation and rationalization will occur, and CZM intends to be an active player in that process.

We expect the boundaries within and around the market will begin to blur (as already evident in cataract and refractive procedures), and we are determined to create integrated systems and solutions that help to bridge the existing divides. We expect that success will ultimately result from innovations that add real value, and that improved outcomes, increased efficiencies or reduced costs will be the ultimate yardsticks. We believe that patients will continue to become more knowledgeable, more demanding and more involved in their own healthcare decisions, and we intend to deliver the quality, precision and excellence in our products that warrant their trust.

We also believe that our clinical partners will be under continual pressure to deliver more and better care with ever limited resources, and we are committed to providing not only products and technologies, but also the innovations in services and support that will help to make this apparent contradiction a reality. Five years from now, CZM expects to be a recognized leader in the ophthalmic market, with a far broader business and technology portfolio, and with even stronger relationships with our clinical partners around the world.

Q. Finally, how would you describe the company's goals in helping ophthalmology in general (and ophthalmologists) advance the capabilities of the profession?

A. From its outset, Zeiss was founded on the principles of advancing science and technology and improving the well-being of employees and society; high standards to meet.

These principles remain at the core of the Zeiss family of companies today, including CZM. Toward those ends, we do directly and indirectly support the advancement of vision care around the world; we have a strong commitment to education and professional development; our employees are frequently involved in local or regional organizations or events, and we are active in societies and other organizations that promote and champion the value of healthcare technologies in general and ophthalmic care specifically. However, our primary focus is to be a valued provider of tools and technologies that enable our customers to do great — and sometimes miraculous — things.