Olivier Bohuon, CEO
Julie Brown, Chief Financial Officer
Michael Frazzette, President, Advanced Surgical Devices
Roger Teasdale, President, Advanced Wound Management
Francisco Canal Vega, President, Latin America
Gordon Howe, Sr. VP, Global Planning & Development
Ros Rivas, Chief Technology Officer
NO. OF EMPLOYEES: 10,477
GLOBAL HEADQUARTERS: London, United Kingdom
It’s been a bit of a roller coaster ride for the orthopedics sector of the medical device industry. And just like it’s easier to weather a storm in a tanker than in a rowboat, larger firms have more weight behind them to endure the rolling market waves.
For London, United Kingdom-based orthopedic giant Smith & Nephew plc, fiscal 2012 (ended Dec. 31) was a mixture of ups and downs, much like those stormy waves tossing ships around in unsteady waters. The large-joint sector—hips and knees—was down in the short term despite the positive demographics working in the sector’s favor. Emerging markets bolstered sales, so did the trauma and extremity markets, though not at stunning percentages. Sales within sectors that aren’t completely orthopedic-specific, such as wound management, also helped to balance flatter results from joint-generated revenue.
For the year, the company reported “healthy underlying revenue and profit growth,” meaning that excluding charges related to factors such as divestitures and the impact of foreign currency fluctuations, there was modest growth. Despite underlying reported growth of 2 percent, fiscal 2012 sales were $4.1 billion compared with $4.2 billion for 2011. Reported trading profit was $965 million, up from 2011’s profit of $961 million. Earnings per share was up 81 cents, more than 25 percent. The company spent $171 million on research and development efforts, up 2 percent from 2011.
Sales from the Advanced Surgical Devices (ASD) group (created in 2011 with the merger of the orthopedic and endoscopy groups) generated $3.1 billion of revenue, compared with $3.3 billion in 2011. Revenue grew by 1 percent in both the United States and other established markets, while emerging and international markets reported a stronger 10 percent uptick in sales. The company’s knee implant business grew 3 percent. The hip implant business declined 3 percent in the face of the continuing industry issues with metal-on-metal hips. Trauma grew 3 percent, and sports medicine joint repair continued to be a strong market, growing at 8 percent. Smith & Nephew has been dedicating additional resources to grow its trauma business—in particular, in the United States, where it is recruiting more sales representatives and created specialist sales teams to serve the differing requirements of trauma and extremities customers. Arthroscopic enabling technologies revenue fell 2 percent. In 2012, the ASD group acquired San Clemente, Calif.-based LifeModeler Inc., a provider of biomechanical human body simulation tools and services and the developer of the software used in creating the company’s Journey BCS knee system. Smith & Nephew had worked with LMI for more than 10 years before the purchase. With the new software capabilities now in house, according to the company, orthopedic innovations can be tested and validated faster and more cost effectively prior to the production of a physical prototype, potentially shortening the time it takes to develop new products and take to market. Terms of the deal were not disclosed.
The company’s Advanced Wound Management (AWM) division delivered $1 billion in revenue, flat from 2011. Revenue was up 7 percent in the United States, 2 percent in other established markets and 11 percent in the emerging markets. The AWM division delivered more than 30 new products or line extensions during 2012. Notably, for this sector of the business, after years of legal wrangling, the company reached a settlement agreement with Winston-Salem, N.C.-based Wake Forest University that resolved all existing negative pressure wound therapy (NPWT) patent litigation. Terms of the settlement were confidential. The original suit had alleged that Smith & Nephew infringed two patents owned by Wake Forest University Health Sciences for technology that had been exclusively licensed to Kinetic Concepts Inc. To add to its AWT coffers, Smith & Nephew completed the $782 million cash acquisition of Healthpoint Biotherapeutics. Healthpoint makes bioactive solutions for debridement, dermal repair and regeneration.
The purchase was part of the company’s “Strategic Priorities” program, launched in 2011, which was implemented to invest in higher-growth products and geographies, as well as working to develop more synergies within the company to reduce cost.
Throughout the year, Smith & Nephew had a number of new product rollouts in markets worldwide.
- The U.S. Food and Drug Administration granted 510(k) clearance for the Polarcup hip system with titanium/ hydroxyapatite coating; the Redapt revision femoral system; the Journey II CR knee system and Journey II deep-dished articular inserts; Twinfix Ultra PK, TI, HA suture anchor for gluteal tendon indications; Footprint Ultra PK suture anchor for gluteal tendon indications; and Bioraptor and Osteoraptor suture anchor for labral reconstruction indications (the labrum is a fibrous cartilage ring that rims the hip socket that is reattached to the bony socket of the joint using small anchors and sutures).
- Several products were approved in Japan including Anthology hip stems; Legion, Verilast CR, PD and Revision knee systems; Genesis knee constrained articular inserts; and Trigen low-profile bone screws for trauma applications.
- In Europe, the company renewed approval for the Journey BCS knee system and obtained approval for Journey II BCS knee system.
As part of the deal, Smith & Nephew received nearly $100 million in cash and a $160 million five-year note from Bioventus.
“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 resources 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 continues to be headquartered in Durham, N.C., and the existing management team, led by its former head of the Smith & Nephew division, Mark Augusti.
“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 Corp. in May 2011); St. Francis Medical (acquired by Kyphon in December 2006 and subsequently acquired by Medtronic Inc. in July 2007); Spinal Concepts (acquired by Abbott Laboratories in June 2003); Confluent Surgical (acquired by Covidien plc in July 2006); United Orthopedic Group and LifeCell (acquired by Kinetic Concepts in April 2008).
Also at the beginning of the fiscal year, the company paid $22.2 million to settle allegations that its subsidiaries paid bribes to win business in Greece. In court papers filed Feb. 6, the U.S. Department of Justice and U.S. Securities and Exchange Commission (SEC) accused Smith & Nephew of charging a Greek distributor full price for its products, then paying to shell companies the amount of discounts usually given. The money sent to the shell companies was used to bribe publicly employed Greek healthcare providers, according to court documents. Between 1998 and 2008, Smith & Nephew’s U.S. and German subsidiaries authorized about $9.4 million in payments to induce the purchase of its medical devices, lawmakers said.
The SEC’s complaint contends that Smith &Nephew subsidiaries created a “slush fund” that make illicit payments to public doctors employed by government hospitals or agencies in Greece. On paper, it appeared as though Smith & Nephew’s subsidiaries were paying for marketing services, but no services actually were performed. The scheme basically created off-shore funds that were not subject to Greek taxes to pay bribes to public doctors to purchase Smith & Nephew products.
“Smith & Nephew’s subsidiaries chose a path of corruption rather than fair and honest competition,” Kara Novaco Brockmeyer, chief of the SEC Enforcement Division’s Foreign Corrupt Practices Act Unit, said in a prepared statement. “The SEC will continue to hold companies liable as we investigate the medical device industry for this type of illegal behavior.”
The SEC’s complaint was filed in U.S. District Court in Washington, D.C. It provided an overview of Smith &Nephew’s corporate structure as well as a brief history of the alleged misconduct, stating that the firm’s U.S.-based subsidiary, Smith & Nephew Inc., and its German subsidiary, Smith & Nephew Orthopaedics GmbH, have sold products in Greece since the 1970s through Greek distributors. Greece has a national healthcare system in which most hospitals are publicly-owned and operated; doctors working at those hospitals are government employees and “foreign officials” as defined in the Foreign Corrupt Practices Act (FCPA).
The SEC claims the alleged misconduct began in 1997, when Smith & Nephew’s subsidiaries developed a scheme to make payments to three United Kingdom-based shell entities controlled by the distributor. Those funds were used by the distributor to pay bribes to Greek doctors on behalf of the Smith & Nephew subsidiaries.
Smith & Nephew failed to stop the bribery once employees became aware of the payments. In one e-mail exchange between employees at the U.S. subsidiary and a distributor over the amount of the commissions, the distributor stated, “… In case it is not clear to you, please understand that I am paying cash incentives right after each surgery…” Smith & Nephew Inc., however, did not reduce commissions. Smith & Nephew agreed to settle the SEC’s charges by paying more than $5.4 million in disgorgement and prejudgment interest. Its subsidiary Smith & Nephew Inc. agreed to pay a $16.8 million fine as part of a deferred prosecution agreement with the Department of Justice. The company also agreed to boost internal controls as well as allow an independent compliance monitor to review its FCPA compliance program for 18 months.
Smith & Nephew’s U.S. base is in Memphis, Tenn.