Smith & Nephew

$3.4 Billion

KEY EXECUTIVES:

John Buchanan, Chairman
David J. Illingworth, CEO
Adrian Hennah, CFO
Joseph M. DeVivo, President, Reconstruction
Joe Woody, President, Advanced Wound Management
Mark Augusti, President, Trauma and Clinical Therapies
Michael Frazette, President, Endoscopy

NO. OF EMPLOYEES:

9,190
   

GLOBAL HEADQUARTERS:

London, United Kingdom

Some may have seen the orthopedic market cool in 2007, but that wasn’t the case for Smith & Nephew. Even as Sir Christopher O’Donnell retired from his post as head of the company’s board at the end of July, David J. Illingworth smoothly stepped into the role of CEO and was able to boast a 21% increase for the year’s revenues by the end of 2007. The double-digit increase, enviable for any company in business, was particularly impressive given 2006 revenues only had grown 9% compared with 2005. Whether examining revenues by product type, sales region or business segment, year-over-year increases were, in some cases, as high as 76%.

Once again, Smith & Nephew used its experience as a 152-year-old company to deftly handle legal entanglements with the government, complete strategic acquisitions, roll out new products and boost profits. By the year’s end, the company’s total revenue was $3.37 billion, compared with $2.78 billion in 2006.

Accounting for more than one-third (37%) of its revenue totals, the Reconstruction segment (overseen from Smith & Nephew’s Memphis, TN location), contributed $1.24 billion in 2007, up 35% from $919 million in 2006. The company reported that 18% of that gain was due to the May 2007 acquisition of Plus Orthopedics, a private Swiss company, for $889 million. Global knee revenue was up 25% for the year to $634 million, while global hip revenue grew 50% to $567 million.

Reconstruction growth (20%) in the United States ($618 million) was attributed to healthy sales for products such as the Legion and Journey knees and the Birmingham hip resurfacing system, all launched in recent years. The company can claim even greater success internationally, with revenue rising 54% in 2007 compared with 2006, bringing the year’s total to $622 million. Europe sales grew 76% (more than half of which was a result of acquisitions), and Japan sales grew 13%.

The next largest contributor to Smith & Nephew’s 2007 revenues, with 23% of total revenues, was the Advanced Wound Management segment. For the year, this unit saw revenue increase 12%, from $698 million in 2006 to $779 million in 2007. US revenues increased 13% to $157 million, while revenues outside the United States were on par with an 11% increase to $622 million. European regions all posted double-digit percentage gains, but growth in Japan was flat, according to the company.

In May 2007, Smith & Nephew strengthened its offerings in wound management by purchasing BlueSky Medical Group, Inc., a private US company, for an initial payment of $15 million, with future milestone payments of up to $95 million. The company’s stated strategy has been to enter to the negative pressure wound therapy market, which the executive team believes is estimated at $1.4 billion. The Allevyn hydrocellular dressings were enhanced with new versions in the past couple of years, with 2007 bringing additions such as silver variants. Acticoat also offered new dressings for infection prevention. Last year, the company also entered into an agreement with Covalon Technologies, Inc. to distribute a range of denatured collagen dressings.

The Endoscopy segment, which added 22% of the company’s total revenue, reported growth of 13% to $732 million, compared with $648 million in 2006. In the United States, sales increased by 5% to $361 million and were driven by the knee and shoulder repair sector as well as revenues from the company’s Visualization and Digital Operating Room, which grew 7% due to the launch of the HD660 camera. Overseas revenue gains were healthier at 22% for the year, bringing the total to $371 million by the close of 2007.

The company expanded its shoulder repair offerings with the launch of the Kinsa RC Suture Anchor, while the arthroscopic hip repair market benefited from the introduction of the Lateral Hip Positioning System. The Endoscopy segment also redesigned and expanded its line of Clear-Trac disposable cannulas. Regulatory clearances also were granted in most major markets (excluding Japan) for the Kinsa anchor, Ultra Fast-Fix, Trufit BGS, 560 High Definition camera system and various arthroscopy instruments and devices.

Revenues from the Trauma and Clinical Therapies segment, which contributed 18% of Smith & Nephew’s total revenue, grew 20% to $618 million in 2007, compared with $514 million in 2006. US revenue for the year increased 12% to $414 million, while international revenue increased 41% to $204 million.

The company’s 2006 acquisition of Durolane hyaluronic acid product paid off in 2007 as it accounted for 5% of the underlying growth in sales outside the United States within clinical therapies (which grew 27% for the year). US clinical therapies operations were aided by a larger sales force that drove growth of Exogen (22%) and Supartz (10%) products. By August 2007, Exogen had captured the industry’s top market share position for long bone stimulation, according to the company

The fixation product segment grew 17% for the year. In the United States, where sales grew 11%, continued growth of the Peri-Loc compression plate system (launched in 2006) and the launch of the Intertan nail contributed to the gains. The Peri-Loc Variable-Angle Locked Plating System was a significant introduction for 2007, as was the Peri-Loc Periarticular Reduction Forcepts Set. Other important launches in fixation included the Large Cannulated Screw System, Trigen Meta-Nail Blocking Screw Instruments, Trigen Percutaneous Intertrochanteric/Femoral Antegrade Nail Instruments and Caption Platelet Rich Concentrate System.

Overall, the company’s largest markets were the United States (46%) and Europe (35%), with Africa, Asia and Australia and other regions rounding out the balance. In the United States, Smith & Nephew reached a settlement in September with the US Attorney for the District of New Jersey’s office with regard to the subpoena the company (along with four other competitors) received in 2005 pertaining to antitrust law violations related to implant sales. Smith & Nephew paid a civil restitution payment of $29 million and legal costs of $1 million, as well as agreed to improve its compliance system.

In the same month, Smith & Nephew, along with some of its competitors, received word of another informal investigation—this time by the US Securities and Exchange Commission—into the company’s marketing practices for its reconstruction products in Germany, Poland and Greece. The company is investigating on a voluntary basis whether any problems or issues have been apparent.

A few minor product recall issues also were dealt with in 2007. In March, the company recalled 539 RF Denervation probes, used with the Electrothermal 20S Spine System in radiofrequency heat lesion procedures for pain relief, due to sterility labeling issues. A packaging error at a subcontractor also led to a voluntary withdrawal of 185 Birmingham Hip Resurfacing System implants. In addition, a precautionary recall was announced for knees from the TC-Plus, VKS and RT-Plus knee ranges after it was deemed that a limited number of semi-finished knee implant castings had a higher-than-specified iron content due to a production error at a supplier’s factory.

On first glance, very little appeared to be slowing Smith & Nephew down in 2008. The company’s first quarter, ended March 29, produced revenue gains of 22% to $911 million, compared with $744 million for the first quarter of 2007. The Reconstruction segment grew a substantial 44% to $377 million, while Advanced Wound Management, Trauma and Clinical Therapies, and Endoscopy had percentage increases of 2% ($189 million), 11% ($151 million) and 10% ($194 million), respectively. New product introductions for 2008 include the Arthrogarde Hip Access Cannula, the Footprint PK Suture Anchor, the R3 Acetabular System, Vertilast Technology and the Caption Disposable Platelet Concentration System.

In spite of the slew of product launches and double-digit sales increases, management said the results for the quarter were tempered by some problematic issues related to sales practices in Europe by Plus Orthopedics—the company now is working to harmonize standards in the group with Smith & Nephew’s company-wide standards. For the full year, the company expects projected revenues to be reduced by about $100 million as a result of the problems. The Trauma and Clinical Therapies segment also had disappointing US sales, which were flat at 1% growth, but Illingsworth noted that European business was strong.  

With favorable global market conditions overall, Illingsworth remained optimistic regardless of the problems he has inherited. “Although this has been a challenging quarter in parts of our business in Europe, we have taken firm action and we are confident that the overall business is in a strong position for continued strong sustainable profit growth,” he concluded.