Roberto Quarta, Chairman
Namal Nawana, CEO
Graham Baker, CFO
Catheryn O’Rourke, Chief Legal Officer
Rodrigo Bianchi, President, International Markets
Vasant Padmanabhan, President of Research & Development
Matthew Stober, President, Global Operations
Glenn Warner, President, United States
Cyrille Petit, Chief Corporate Development Officer and President, Global Business Services
NO. OF EMPLOYEES: 15,933
GLOBAL HEADQUARTERS: London, United Kingdom
The buzz was back. Bigger than ever this time.
The babble, however, shouldn’t have been a surprise to anyone, least of all to Olivier Bohuon. He’s heard the rumors before (practically per annum) during his seven-year reign as Smith & Nephew’s CEO, and he’s addressed those whispers almost as often—to no avail.
Truth be told, the rumors have never really gone away. They’ve existed for many years—well before Bohuon’s tenure—ebbing and flowing with the various changes in Smith & Nephew’s finances, management, and stakeholder team.
The most recent round of hearsay began circulating last fall amid reports of Bohuon’s retirement and the addition of activist investor Elliott Management Corp. as a top shareholder (billionaire Paul Singer’s hedge fund is considered a particularly aggressive backer, having launched activist campaigns at more than 50 companies over the last five years—19 of them occurring in 2017). “We believe the two events [Bohuon and Elliott Management] might be related and that they likely signal a change in strategy that could include selling the company,” Needham & Co. analyst Mike Matson wrote in an October note to investors.
Such speculation intensified earlier this year after Smith & Nephew implemented a major cost-cutting program to boost earnings and replaced Bohuon with a chief executive acclaimed for his deal-making prowess. Namal Nawana, master integrator of the DePuy-Synthes union and orchestrator of last year’s Alere Inc.-Abbott Laboratories pairing, began his rule on May 7 (Bohuon remains with the United Kingdom-based company in an advisory role until Nov. 6).
Takeover rumors continue to swirl as Nawana wrangles with slow revenue growth and stockholder pressure to improve profit margins. A disappointing first quarter (2018) prompted Smith & Nephew to lower its full-year guidance by one percentage point, leaving the firm with a (currently) slim-to-none chance of topping its 2017 overall growth rate.
ANALYST INSIGHTS: As merger buzz continues to swirl around, there seems to be confusion in where the business will go and what the true future for the company is. In 2018/2019, executives can hopefully conclude one way or another to stabilize paths forward.
—Marissa K. Fayer, CEO and Founder, Health Equity for Women and HERHealthEQ
Smith & Nephew’s overall revenue swelled 2 percent last year to $4.76 billion and trading profit climbed 3 percent to $1.05 billion, according to company financial data. Operating profit jumped 17 percent to $934 million but earnings per share (EPS) remained flat at 87.8 cents.
“We could clearly see areas of the business where the company excelled in 2017, such as Global Operations where we have improved quality and supply, and R&D, where we have an exciting new product pipeline,” Board Chairman Roberto Quarta told investors in Smith & Nephew’s 2017 annual report. “Whilst the trading performance of the Group was better than in 2016 and we delivered within our guidance, we continue to endorse the chief executive’s view that this business can and should deliver better results and reinforce the need for continued focus on driving better execution.”
Indeed, Smith & Nephew turned in a mediocre financial performance last year, posting gains in several geographic and product categories but incurring losses (or flat growth) in various others. United Kingdom sales, for example, fell 8.3 percent to $244 million, while U.S. and Other Established Markets revenue remained flat at $2.3 billion and $1.67 billion, respectively. Emerging markets proceeds, however, ballooned 13 percent to $781 million on the strength of double-digit growth in China as well as increased business in the Middle East.
Five of Smith & Nephew’s nine product categories sustained losses or stagnant sales last year. Hip Implants, Advanced Wound Care, and Advanced Wound Bioactives revenue was flat while Arthroscopic Enabling Technologies and Other Surgical Businesses proceeds were down compared to 2016 totals.
Hip sales fared better in the second half of 2017, thanks mainly to the REDAPT Revision Femoral and POLARSTEM Cementless Stem systems, but the franchise could only muster a $2 million sales increase compared with 2016 (to $599 million). The REDAPT system is comprised of a monolithic stem, a 3D-printed porous shell, and a fully porous acetabular cup (introduced in 2016). The POLARSTEM implant, contrarily, is made for direct anterior approach procedures and has a profile intended for easy insertion through a smaller incision.
Advanced Wound Bioactives revenue suffered the same fate as Hips, gaining sales momentum in the second half of 2017 but failing to eclipse the $342 million it generated the previous year. The last-half trajectory was largely driven by SANTYL Ointment sales and its growing popularity with office-based doctors, but it was partially offset by waning reimbursements for Smith & Nephew’s OASIS Wound Matrix, a naturally-derived extracellular matrix replacement for chronic and traumatic wound treatment. SANTYL also benefited from new clinical data proving its efficacy as a pressure ulcer treatment, but that advantage could not overcome the reimbursement headwinds.
Advanced Wound Care sales fell victim to “soft” market conditions in Europe but strong U.S. growth kept the franchise (barely) in the black through a $1 million sales increase (to $720 million).
Soft market conditions also impacted Arthroscopic Enabling Technology sales, leading to a 2.5 percent sales decline last year (to $615 million). The “softness” affected mostly the mechanical resection sector and Smith & Nephew’s legacy radiofrequency technology, which includes the WEREWOLF and QUANTUM 2 COBLATION controllers and high-performance COBLATION wands for ablating, resecting, and coagulating soft tissue, and enabling blood vessel haemostasis.
“Our new LENS visualization system and WEREWOLF COBLATION system are growing in share within our portfolio and we expect a gradual improvement in 2018,” Smith & Nephew’s annual report said.
ANALYST INSIGHTS: Another company that was forced to change leadership due to investor pressure, Smith & Nephew’s new CEO has work to do in terms of both portfolio management and organic execution. Watch for increased short-term execution while portfolio moves may come later in 2018 or in 2019.
—Dave Sheppard, Co-Founder and Principal, MedWorld Advisors
An improvement also is likely within the Other Surgical Businesses franchise, which comprises the company’s ENT (ear, nose, and throat) portfolio and the NAVIO Surgical System, a next-generation handheld robotics platform designed to help surgeons better align implants, balance ligaments, and prepare bone for surgery. Last year, the company expanded the NAVIO platform to support its JOURNEY II, LEGION Primary, and GENESIS II total knee arthroplasty systems but the augmentation could not spare the franchise from an 11.7 percent sales decline (to $189 million). Smith & Nephew attributed the loss to the 2016 divestiture of its Gynaecology business.
Although it was powerless against the divestiture, the NAVIO System nevertheless helped Smith & Nephew further entrench itself in the highly competitive global knee replacement market. In Q4 last year, the company initiated the limited market release of the NAVIO platform for its JOURNEY II XR bi-cruciate retaining total knee, which features a tibial baseplate designed for optimal fixation and fatigue strength, and Smith & Nephew’s Verilast low-friction technology.
The company also ventured into new markets last year with its ANTHEM Total Knee System and accompanying ORTHOMATCH Universal instruments—products specifically tailored to meet the anatomical needs of Asian, Middle Eastern, African, and Latin American patients. Smith & Nephew specifically introduced the ANTHEM system to customers in Chile, Colombia, India, Mexico, the Middle East, Russia, and South Africa over the course of 2017, bolstering demand for the product and contributing to a 5.6 percent spike in Knee Implants revenue (to $984 million). Strong demand for the JOURNEY II Total Knee System and LEGION Revision Knee System positively impacted sales totals as well.
Strong demand was a driving force within the Sports Medicine Joint Repair franchise too, particularly for Smith & Nephew’s shoulder repair portfolio. The popularity of products like ULTRATAPE, FIRSTPASS ST (a retrograde suture passer), MULTIFIX S (an all-PEEK knotless screw-in anchor), and HEALICOIL (a family of open architecture suture anchors) helped increase total sales 6.8 percent to $627 million last year. The company also rolled out its new LENS Surgical Imaging and WEREWOLF COBLATION systems to customers in 2017, and ensured future growth through the $210 million purchase of Plymouth, Minn.-based Rotation Medical Inc., developer of tissue regeneration technology for rotator cuff repair. The postage stamp-sized product received U.S. Food and Drug Administration clearance in 2014.
“The Rotation Medical Rotator Cuff System is an innovative technology serving unmet clinical needs,” Bohuon said upon announcing the acquisition in late October. “It is highly complementary to our Sports Medicine portfolio and provides a compelling new treatment option for our customers. Rotation Medical further strengthens our strategy to invest in disruptive technologies that accelerate the transformation of Smith & Nephew to higher growth.”
Expediting the path to higher growth in Trauma & Extremities was the TRIGEN INTERTAN hip fracture system, a product clinically linked to lower implant failure/revision surgery risk, faster times to fracture union, and a high return to pre-fracture status. Sales in this product franchise rose 4.2 percent in 2017 to $495 million.
Advanced Wound Devices more than tripled that growth rate last year, increasing sales 12.8 percent to $194 million on the strength of its PICO system. The single-use, canister-free negative pressure wound therapy solution is designed to treat both open wounds such as pressure ulcers and closed incisions.
“In 2017, I was pleased with the resultant commercial performance in many areas,” Bohuon said in Smith & Nephew’s annual report. “Our healthy balance sheet, good cash generation, and increased dividend demonstrate the robust foundations underpinning our business.”
Smith & Nephew reinforced those foundations with several partnerships and distribution agreements that give the company access to new technologies. Those alliances include:
- A partnership/distribution deal with Leaf Healthcare, a developer of a wireless patient monitoring system for pressure ulcer/injury prevention. The technology is reportedly “highly complimentary” to Smith & Nephew’s Allevyn Life and Secura skin care products.
- A partnership with Imperial College in London to develop enhanced surgical techniques relating to ligament function, biomechanics, and soft tissue injuries of the knee, including torn menisci and anterior cruciate ligament rupture. The three-year union with the college’s Department of Mechanical Engineering will focus on biomechanical research into extra-articular ligaments and their functions while gaining insight into the meniscus, the cartilage disc acting as a cushion between the femur and tibia.
- A collaboration with the University of Hull to drive research into revolutionary approaches to wound care. The pairing is expected to create one of the world’s largest Wound Care Research Clusters to develop scientific insights and pioneering treatments for advanced wound care.