Smith & Nephew Executives Discuss 2013 Q2

In the wake of the release of Smith & Nephew plc’s 2013 second-quarter financial results, which showed weak performance for orthopedic reconstruction for the sixth quarter in a row, is the company shifting its focus from recon to growing other market segments more aggressively? For example, the company has $1.5 billion on hand to spend on acquisitions in trauma and sports medicine deals. The company’s leadership disputes that notion. During a recent conference call discussing the quarter results, an analyst challenged executives on their weak orthopedic reconstruction performance, asking whether the company is not focusing on the problem area enough.

“You’ve now grown below the market for six quarters in a row,” said an anonymous analyst. “Are we focusing too much on M&A [mergers and acquisitions] and not enough on core orthopedics?”

Olivier Bohuon, Smith & Nephew’s CEO, defended the company’s position in the ortho recon market, saying that its poor performance “nothing to do with M&A” because “the teams are different.”

“We have been at roughly 11 percent of market share for the last 10 years,” Bohuon continued. “It’s up and down, and we’re down … we lose market share because we’re down in cycle and because we’re very strong in Europe, and Europe is a problem.”

A weak European economy and market wariness about all-metal hips caused knees and hips to decline in revenue on the quarter by 1 percent each. However, Bohuon pointed out that the May release of Journey II, a family of knee replacements, is hoped to push the ortho recon segment forward.

“As we said last quarter, we have identified areas for making targeted investments to improve our customer-focused services,” the CEO said. “This follows the restructuring of our ASD [advanced surgical devices] business over the last 18 months. Specifically, we are accelerating the scale of the Journey II re-launch. We believe Journey II offers unmatched function, motion and durability for patients, and we’re putting more instrument sets in the field and increasing the number of training courses for surgeons … the launch of Journey II this year is critical for us. We have put everything we can behind this.”

ASD delivered total revenue of $741 million in the quarter, up 1 percent underlying on the same period last year (2012 Q1 brought in $774 million). While revenue was down 1 percent in the United States and 2 percent in our other established markets, this was more than offset by a 16 percent increase in the emerging and international markets.

Sports medicine joint repair grew by 6 percent on the same quarter last year. Executives noted that the company has a strong lineup of new product launches across shoulder and hip repair in the pipeline for the second half of the year. Arthroscropic enabling technologies remained flat, with good performance in Europe. Smith & Nephew is launching a low-cost camera system in emerging markets that is hoped to broaden the availability of sports medicine in those countries and boost its market performance in the segment.

Trauma showed 2 percent growth. This quarter, Smith &Nephew acquired Adler Mediequip and the brands and assets of Sushrut Surgicals in India, makers of mid-tier, orthopedic trauma products. Growth in the segment was slower than in recent quarters due to a significant trauma tender win in the Middle East, which was expected to lead to “some volatility in growth.”

Advanced wound management grew by 10 percent in the quarter, bringing in $333 million. During the period, the company launched seven new products, and has begun the launch of its negative pressure range, Renasys and Pico, into some of the emerging and international markets. Under this segment, advanced wound care grew at 1 percent with revenue of $211 million, performing better in Europe. Advanced wound devices grew by an impressive 27 percent despite increased competitive pressure in the established market, bringing in $52 million. The company’s disposable negative pressure system, Pico, is doing well driven by a marketing focus on specific indications. Advanced wound bioactives grew by 35 percent to $70 million, driven by strong growth in Santyl ointment.

Overall the quarter brought in $1.07 billion on the quarter compared to $1.03 billion for the same quarter last year. Revenue in the United States grew by 3 percent, was flat in other established market, and performance was weak in Europe as indicated by Bohuon.

“We continued to build our platform in the emerging and international markets, announcing the intention to acquire assets relating to the distribution of our Advanced Surgical Devices portfolio in Turkey,” read a statement from Smith & Nephew. “This will bring us closer to our customers in this important and fast growing market and follows agreements in Brazil and India announced last quarter.”