S&N Sells Control of Biologics Division to Private Equity

Smith & Nephew PLC is spinning of its biologics unit.

The move is part of a joint venture that will be majority owned by Essex Woodlands, a healthcare private equity firm. The spinoff comes as Smith & Nephew’s orthopedics business is being squeezed by tighter healthcare budgets and reimbursement challenges.

According to leadership at United Kingdom-based Smith & Nephew, the move will give the company a much-needed infusion of cash to fund other new product research and development activities. The joint venture will result in a new company called Bioventus LLC, which will be 51 percent owned by Essex Woodlands and 49 percent by Smith & Nephew.

As part of the deal, Smith & Nephew will receive nearly $100 million in cash, which will be used to pay down debt, and a $160 million five-year note from Bioventus. The transaction is expected to be completed in the next few months and is expected to reduce Smith & Nephew’s earnings per share slightly.

“In a single act we have given our existing biologics business the resources to address longer-term development projects, retained access to the exciting area of orthobiologics, realized value for reinvestment in nearer-term opportunities, and freed up management resource to focus on driving efficiencies in established markets,” said CEO Olivier Bohuon. “Essex Woodlands are strong partners and the joint venture will benefit from their significant expertise in developing healthcare businesses.”

The business will continue to be headquartered in Durham, N.C., and the existing management team, led by its current president, Mark Augusti, will transfer to Bioventus, according to a press release issued by Essex Woodlands. Smith & Nephew plans to keep its research facility in northern England.

“We are very excited about the formation of Bioventus and our strategic partnership with Smith & Nephew to advance innovation in orthobiologics,” said Marty Sutter, founding partner and managing director of Essex Woodlands. “We applaud Smith & Nephew for their forward thinking in working with Essex Woodlands and our partners in this groundbreaking venture. No one has created such a platform for innovation before”

Essex Woodlands’ investors are no strangers to the orthopedic market. Past investments include Orthovita (acquired by Stryker in May 2011); St. Francis Medical (acquired by Kyphon in December 2006 and subsequently acquired by Medtronic in July 2007); Spinal Concepts (acquired by Abbott Laboratories in June 2003); Confluent Surgical (acquired by Covidien in July 2006); United Orthopedic Group and LifeCell (acquired by Kinetic Concepts in April 2008).

Last year, biologics and clinical therapies business of Smith & Nephew’s generated a profit of $44 million on revenue of $223 million, of which $33 million came from sales outside the United States. In November, Smith & Nephew reported slight drop in third-quarter but that it expects improvements in the fourth quarter. Full-year results will be released on Feb. 1.

Essex Woodlands has offices in Palo Alto, Calif.; Houston, Texas; New York, N.Y.; and London, England.