08.05.15
$4.62 Billion
KEY EXECUTIVES:
Olivier Bohuon, CEO
Mike Frazzette, President, Advanced Surgical Devices
Glenn Warner, President, Advanced Wound Management
Gordon Howe, President, Global Operations
Cyrille Petit, Chief Corporate Development Officer
Arjun Rajaratnam, Chief Compliance Officer
Brad Cannon, President, Global Orthopedic Franchises
NO. of EMPLOYEES: 14,000
HEADQUARTERS: London, United Kingdom
It seems like 2014 was all about the art of the acquisition. London-based Smith & Nephew plc was one of the first medtech companies to announce a blockbuster deal.
In February, company officials unveiled plans to buy Austin, Texas-based sports medicine company ArthroCare Corp. for $1.7 billion. ArthroCare made products used in arthroscopic surgery on shoulders and knees, focusing on soft-tissue surgery, making devices, instruments and implants that improve surgical procedures, including a radiofrequency technology that dissolves soft tissue with less damage than traditional heat-driven processes.
Calling the deal “compelling” at the time, Olivier Bohuon, CEO of Smith & Nephew, said the buy would “rebalance” Smith & Nephew in areas of higher growth. He noted that his company’s sports medicine business currently was growing by a high single-digit percentage, compared with a low single-digit growth range for replacement hips and knees.
“We wanted to acquire in high-growth businesses, and sports medicine is definitely one of them,” he said.
Smith & Nephew officials highlighted when the deal was announced that cost reductions and additional sales would boost their firm’s annual profit picture by about $85 million in the third full year after the purchase is complete. Integration costs would be around $100 million over a three-year period.
The companies were no strangers to doing business together. Smith & Nephew’s sports medicine arthroscopic business had sold ArthroCare’s Colblation RF technology through a licensing agreement. The acquisition eliminates payments to ArthroCare, which amounted to approximately $24 million in 2012.
“ArthroCare and Smith & Nephew know each other well from our licensing and supply arrangements, and this is a natural transaction for both companies,” said David Fitzgerald, president and CEO of ArthroCare prior to the completed acquisition. “The board [of directors] believes that this transaction is in the best interest of our shareholders.”
Once the deal was closed, Fitzgerald—along with other top executives—left ArthroCare.
Among the strategic reasons for the purchase that Bohuon noted, were:
In January, ArthroCare resolved a long-standing investigation by the U.S. Department of Justice, paying a $30 million fine to settle allegations of securities fraud by former management. The settlement made the buyout more likely, Raj Denhoy, an analyst at Jefferies LLC, told The Wall Street Journal at the time.
But the road to a finalized deal wasn’t without potholes. As soon as the deal was announced, a group of ArthroCare shareholders sued, claiming the deal was undervalued.
Smith & Nephew agreed to pay $12 million to settle the legal wrangling. ArthroCare investors alleged in lawsuits filed in Wilmington, Del., that the offer didn’t meet what they felt the company’s value ought to be. The agreed upon price was 6.3 percent more than ArthroCare’s closing price Jan. 31 in Nasdaq trading. ArthroCare rose above the takeover price, indicating some investors might be speculating on a higher offer. Smith & Nephew settled to avoid the “inconvenience, expense, risk, and distraction of further litigation,” according to court papers filed on April 10. Company officials denied all allegations of wrongdoing or liability. Shareholders approved the deal in May last year and the purchase was wrapped up on the 29th of that month.
New Product Highlights
With more than 5 percent ($235 million in FY14) of the company’s revenue going toward research and development, you’d expect a strong, steady product pipeline—and FY14 certainly saw its fair share of new technology rollouts and strategic partnerships. There were quite a few notable new product milestones for the 159-year-old company in fiscal 2014.
October saw the launch of the Evos Mini plating system for complex long-bone fractures of the arm and leg. The system is designed specifically for trauma surgeons, and includes a variety of mini, flat plates and screw sizes necessary to address both fracture reduction and short-term fixation while the final, load-bearing repair is being completed. According to Smith & Nephew, a growing trend among trauma specialists involves reducing long-bone fractures using a mini fragment system designed for either the hand or foot. However, because the plates in traditional systems are designed for the more rounded shape of the body’s small bones, surgeons often have to modify the plates. Because they are meant to be used on the smaller, thinner bones of the hand and foot, the screws designed for these systems often are too short to use in larger, dense long bones such as the thigh or forearm.
Organized into a single tray, each Evos Mini plating system includes three different, color-coded, size modules that offer a variety of up to eight low-profile plate geometries. Along with the plates, each module also offers the instrumentation for implementing the corresponding low-profile screw options for cortical, cancellous and osteopenic bone. With sizes up to 80 millimeters, the system’s screws also offer variable-angle locking technology, which allows placement of a locking screw up to 15 degrees off-axis.
In July 2014, Smith & Nephew entered the forefoot market with the launch of its Hat-Trick toe repair system. Comprising three separate repair options, the Hat-Trick system includes products for metatarsophalangeal ligament repair and reconstruction, a metatarsal osteotomy guide, and a revisable, all-PEEK (polyether ether ketone) implant for proximal inter-phalanges fusion, also known as hammer toe correction. “Although treating lesser toe deformities is extremely common, getting consistently predictable outcomes has eluded surgeons worldwide,” explained orthopedic surgeon Charles Saltzman, M.D., chairman of the system’s scientific advisory board. “Current standards of treatment are known to have unacceptably high complication rates. The Hat-Trick system is a new three-part approach designed to not only treat the deformity, but also the underlying problem that led to the deformity in the first place.”
Also in July, Smith & Nephew signed an agreement with Blue Belt Technologies, makers of the Navio orthopedic surgical system. Under this agreement, surgeons using the Navio system will be able to implant Smith & Nephew’s Journey Uni partial knee. The Navio System provides surgeons with precise surgical planning and handheld robotic-controlled bone preparation for use with partial knee replacements. Through its advanced, intraoperative navigation, the system guides the surgeon in optimally placing the implant and balancing the knee in order to deliver consistent results.
In March, during the annual meeting of the American Academy of Orthopaedic Surgeons, Smith & Nephew rolled out its much-anticipated Journey II cruciate retaining (CR) knee replacement. The new implant extended the Journey II total knee system to procedures that preserve the posterior cruciate ligament, which accounts for approximately half of all knee replacement procedures. The Journey II CR knee is designed to restore more normal motion via the reproduction of both the shapes of the joint’s hard surfaces and the normal force behavior of the soft tissues, such as ligament and muscle firing patterns. As a result, the soft tissue’s readjustment to new shapes and forces after surgery is minimized, helping to return the patient’s stride to its natural motion, according to the company. The Journey II CR knee is made from Smith & Nephew’s Verilast technology, which is the combination of two wear-reducing materials, proprietary Oxinium alloy and a highly crosslinked plastic liner.
Also in March, Smith & Nephew announced a partnership with Dania Beach, Fla.-based OrthoSensor, which develops “intelligent” orthopedic devices and data services designed to provide quantitative feedback to surgeons and hospitals. OrthoSensor’s Verasense sensor-assisted surgery technology for soft tissue balancing will be used when implanting Smith & Nephew’s Journey II and Legion total knee systems. Smith & Nephew joined other orthopedic implant manufacturers—Zimmer, Biomet and Stryker, to name a few—in using OrthoSensor’s technology. Verasense uses sensor technologies to enable evidence-based surgical decisions regarding component position, limb alignment and soft-tissue balance to improve outcomes in total knee replacement.
Historically, soft-tissue balancing has been accomplished by subjective surgeon feel. According to OrthoSensor, research shows that patients whose knees have been balanced with its system report less pain and experience greater improvements in function, activity levels and satisfaction postoperatively. At year-one, 97 percent of patients whose knees were quantifiably balanced using Verasense sense said they were “satisfied” to “very satisfied” with the outcome of their total knee arthroplasty, which the company points to as a “marked improvement” compared to the average 81 percent satisfaction reported following traditional surgery without the Verasense technology.
In February, the company launched its Polarstem cementless stem for total hip replacement in the United States. Available outside the United States since 2002, the implant is one of the company’s most popular stems globally and features a unique geometry and surface texture. Polarstem earned 510(k) clearance from the U.S. Food and Drug Administration (FDA) in October of 2013. Polarstem implant offers several design features that assist with muscle sparing approaches for U.S. surgeons who use the direct anterior approach for total hip replacement. For example, the proximal portion of the stem is wider to help reduce the possibility of movement downward into the bone. The distal portion of the stem is shorter and features a narrower tip, making it easier to implant through the smaller incision used in the direct anterior approach. Lastly, the stem features an advanced surface texture of titanium plasma and a hydroxyapatite layer.
Verilast technology is a low-friction bearing couple combining Oxinium oxidized zirconium, a patented ceramicized metal alloy for the femoral head, and a cross-linked polyethylene (XLPE) cup liner for the acetabulum. During lab testing, Verilast technology demonstrated 67 percent less wear than the combination of cobalt chrome and XLPE. With the direct anterior approach, an incision is made on the front of the hip rather than the side or back. As a result, the surgeon can follow the natural spaces between the hip joint’s muscles and tendons, thereby minimizing the damage to the surrounding soft tissues. Because there is less soft tissue that needs to heal, patients undergoing direct anterior hip surgery reported less postoperative pain. Additionally, because the gluteal muscles and other natural stabilizers are left undisturbed during the direct anterior approach, it is possible for patients to regain mobility more quickly and ultimately go home from the hospital sooner.
Financial Details
For fiscal 2014 (ended Dec. 31), revenue was $4.62 billion, an increase of 2 percent on an underlying basis and 6 percent on a reported basis (2013: $4.35 million). Acquisitions added 5 percent to the reported growth rate, while currency was responsible for a 1 percent negative impact on growth.
“Our 2014 performance reflects the choices we have made to invest in transforming the growth profile of Smith & Nephew,” noted CEO Bohuon in a prepared statement. “We improved our existing businesses, driving a sustained improvement in U.S. hip and knee implants and building rapidly in the emerging markets. We strengthened our higher growth platforms, acquiring ArthroCare to give us a broader sports medicine portfolio. We created new growth platforms with the mid-tier portfolio and Syncera disruptive models that fulfill unmet customer needs, and advanced wound bioactives again delivered double-digit growth.”
The Advanced Surgical Devices (ASD) division delivered 2014 revenue of $3.29 billion, up 3 percent (2013: $3.02 billion).
Revenue was up 2 percent in the United States to $1.56 billion, flat in “other established markets” at $1.23 billion, and up 17 percent in the emerging and international markets to $511 million. All franchises contributed to improved performance with revenue growth in knee implants up 2 percent to $654 million; hip implants up 1 percent to $873 million; trauma and extremities up 4 percent to $506 million; sports medicine joint repair up 8 percent to $576 million; arthroscopic enabling technologies up 1 percent to $542 million; and other ASD (including ear, nose and throat and gynecology) up 10 percent to $147 million.
The Advanced Wound Management segment is grouped into disposable wound care products (Advanced Wound Care), electrical equipment for wound therapy (Advanced Wound Devices), and bioactives (Advanced Wound Bioactives). Sales for Advanced Wound Management delivered 2014 revenue of $1.32 billion, down 1 percent on an underlying basis (2013: $1.35 billion). For Advanced Wound Management, revenue was down 4 percent in the United States ($454 million) and 2 percent in other established markets ($699 million), and up 14 percent in the emerging and international markets ($166 million). Advanced Wound Care revenue was down 4 percent ($805 million). Sales of Advanced Wound Devices were down 9 percent ($192 million), impacted by the U.S. Renasys hold. Sales of Advanced Wound Bioactives, however, delivered strong growth, up 15 percent ($322 million).
Smith & Nephew temporarily ceased commercial distribution of its Renasys negative pressure wound therapy product line in the United States. This action followed instruction from the FDA to obtain new regulatory clearances through the premarket notification process with respect to certain design enhancements made to the systems.
Operating profit for 2014 was $749 million (2013: $810 million), reflecting acquisition costs largely relating to ArthroCare, amortization of acquisition intangibles, and legal and other items incurred. Profit before tax was $714 million (2013: $802 million).
KEY EXECUTIVES:
Olivier Bohuon, CEO
Mike Frazzette, President, Advanced Surgical Devices
Glenn Warner, President, Advanced Wound Management
Gordon Howe, President, Global Operations
Cyrille Petit, Chief Corporate Development Officer
Arjun Rajaratnam, Chief Compliance Officer
Brad Cannon, President, Global Orthopedic Franchises
NO. of EMPLOYEES: 14,000
HEADQUARTERS: London, United Kingdom
It seems like 2014 was all about the art of the acquisition. London-based Smith & Nephew plc was one of the first medtech companies to announce a blockbuster deal.
In February, company officials unveiled plans to buy Austin, Texas-based sports medicine company ArthroCare Corp. for $1.7 billion. ArthroCare made products used in arthroscopic surgery on shoulders and knees, focusing on soft-tissue surgery, making devices, instruments and implants that improve surgical procedures, including a radiofrequency technology that dissolves soft tissue with less damage than traditional heat-driven processes.
Calling the deal “compelling” at the time, Olivier Bohuon, CEO of Smith & Nephew, said the buy would “rebalance” Smith & Nephew in areas of higher growth. He noted that his company’s sports medicine business currently was growing by a high single-digit percentage, compared with a low single-digit growth range for replacement hips and knees.
“We wanted to acquire in high-growth businesses, and sports medicine is definitely one of them,” he said.
Smith & Nephew officials highlighted when the deal was announced that cost reductions and additional sales would boost their firm’s annual profit picture by about $85 million in the third full year after the purchase is complete. Integration costs would be around $100 million over a three-year period.
The companies were no strangers to doing business together. Smith & Nephew’s sports medicine arthroscopic business had sold ArthroCare’s Colblation RF technology through a licensing agreement. The acquisition eliminates payments to ArthroCare, which amounted to approximately $24 million in 2012.
“ArthroCare and Smith & Nephew know each other well from our licensing and supply arrangements, and this is a natural transaction for both companies,” said David Fitzgerald, president and CEO of ArthroCare prior to the completed acquisition. “The board [of directors] believes that this transaction is in the best interest of our shareholders.”
Once the deal was closed, Fitzgerald—along with other top executives—left ArthroCare.
Among the strategic reasons for the purchase that Bohuon noted, were:
- Creation of a comprehensive resection and repair portfolio with “exciting growth” prospects;
- Combination of ArthroCare’s latest generation of radio frequency technology and Smith & Nephew’s mechanical blade portfolio to give customers greater choice; and
- ArthroCare’s shoulder anchor innovation “strongly” complements Smith & Nephew’s strength in knee repair, forming an “extensive, integrated portfolio.”
In January, ArthroCare resolved a long-standing investigation by the U.S. Department of Justice, paying a $30 million fine to settle allegations of securities fraud by former management. The settlement made the buyout more likely, Raj Denhoy, an analyst at Jefferies LLC, told The Wall Street Journal at the time.
But the road to a finalized deal wasn’t without potholes. As soon as the deal was announced, a group of ArthroCare shareholders sued, claiming the deal was undervalued.
Smith & Nephew agreed to pay $12 million to settle the legal wrangling. ArthroCare investors alleged in lawsuits filed in Wilmington, Del., that the offer didn’t meet what they felt the company’s value ought to be. The agreed upon price was 6.3 percent more than ArthroCare’s closing price Jan. 31 in Nasdaq trading. ArthroCare rose above the takeover price, indicating some investors might be speculating on a higher offer. Smith & Nephew settled to avoid the “inconvenience, expense, risk, and distraction of further litigation,” according to court papers filed on April 10. Company officials denied all allegations of wrongdoing or liability. Shareholders approved the deal in May last year and the purchase was wrapped up on the 29th of that month.
New Product Highlights
With more than 5 percent ($235 million in FY14) of the company’s revenue going toward research and development, you’d expect a strong, steady product pipeline—and FY14 certainly saw its fair share of new technology rollouts and strategic partnerships. There were quite a few notable new product milestones for the 159-year-old company in fiscal 2014.
October saw the launch of the Evos Mini plating system for complex long-bone fractures of the arm and leg. The system is designed specifically for trauma surgeons, and includes a variety of mini, flat plates and screw sizes necessary to address both fracture reduction and short-term fixation while the final, load-bearing repair is being completed. According to Smith & Nephew, a growing trend among trauma specialists involves reducing long-bone fractures using a mini fragment system designed for either the hand or foot. However, because the plates in traditional systems are designed for the more rounded shape of the body’s small bones, surgeons often have to modify the plates. Because they are meant to be used on the smaller, thinner bones of the hand and foot, the screws designed for these systems often are too short to use in larger, dense long bones such as the thigh or forearm.
Organized into a single tray, each Evos Mini plating system includes three different, color-coded, size modules that offer a variety of up to eight low-profile plate geometries. Along with the plates, each module also offers the instrumentation for implementing the corresponding low-profile screw options for cortical, cancellous and osteopenic bone. With sizes up to 80 millimeters, the system’s screws also offer variable-angle locking technology, which allows placement of a locking screw up to 15 degrees off-axis.
In July 2014, Smith & Nephew entered the forefoot market with the launch of its Hat-Trick toe repair system. Comprising three separate repair options, the Hat-Trick system includes products for metatarsophalangeal ligament repair and reconstruction, a metatarsal osteotomy guide, and a revisable, all-PEEK (polyether ether ketone) implant for proximal inter-phalanges fusion, also known as hammer toe correction. “Although treating lesser toe deformities is extremely common, getting consistently predictable outcomes has eluded surgeons worldwide,” explained orthopedic surgeon Charles Saltzman, M.D., chairman of the system’s scientific advisory board. “Current standards of treatment are known to have unacceptably high complication rates. The Hat-Trick system is a new three-part approach designed to not only treat the deformity, but also the underlying problem that led to the deformity in the first place.”
Also in July, Smith & Nephew signed an agreement with Blue Belt Technologies, makers of the Navio orthopedic surgical system. Under this agreement, surgeons using the Navio system will be able to implant Smith & Nephew’s Journey Uni partial knee. The Navio System provides surgeons with precise surgical planning and handheld robotic-controlled bone preparation for use with partial knee replacements. Through its advanced, intraoperative navigation, the system guides the surgeon in optimally placing the implant and balancing the knee in order to deliver consistent results.
In March, during the annual meeting of the American Academy of Orthopaedic Surgeons, Smith & Nephew rolled out its much-anticipated Journey II cruciate retaining (CR) knee replacement. The new implant extended the Journey II total knee system to procedures that preserve the posterior cruciate ligament, which accounts for approximately half of all knee replacement procedures. The Journey II CR knee is designed to restore more normal motion via the reproduction of both the shapes of the joint’s hard surfaces and the normal force behavior of the soft tissues, such as ligament and muscle firing patterns. As a result, the soft tissue’s readjustment to new shapes and forces after surgery is minimized, helping to return the patient’s stride to its natural motion, according to the company. The Journey II CR knee is made from Smith & Nephew’s Verilast technology, which is the combination of two wear-reducing materials, proprietary Oxinium alloy and a highly crosslinked plastic liner.
Also in March, Smith & Nephew announced a partnership with Dania Beach, Fla.-based OrthoSensor, which develops “intelligent” orthopedic devices and data services designed to provide quantitative feedback to surgeons and hospitals. OrthoSensor’s Verasense sensor-assisted surgery technology for soft tissue balancing will be used when implanting Smith & Nephew’s Journey II and Legion total knee systems. Smith & Nephew joined other orthopedic implant manufacturers—Zimmer, Biomet and Stryker, to name a few—in using OrthoSensor’s technology. Verasense uses sensor technologies to enable evidence-based surgical decisions regarding component position, limb alignment and soft-tissue balance to improve outcomes in total knee replacement.
Historically, soft-tissue balancing has been accomplished by subjective surgeon feel. According to OrthoSensor, research shows that patients whose knees have been balanced with its system report less pain and experience greater improvements in function, activity levels and satisfaction postoperatively. At year-one, 97 percent of patients whose knees were quantifiably balanced using Verasense sense said they were “satisfied” to “very satisfied” with the outcome of their total knee arthroplasty, which the company points to as a “marked improvement” compared to the average 81 percent satisfaction reported following traditional surgery without the Verasense technology.
In February, the company launched its Polarstem cementless stem for total hip replacement in the United States. Available outside the United States since 2002, the implant is one of the company’s most popular stems globally and features a unique geometry and surface texture. Polarstem earned 510(k) clearance from the U.S. Food and Drug Administration (FDA) in October of 2013. Polarstem implant offers several design features that assist with muscle sparing approaches for U.S. surgeons who use the direct anterior approach for total hip replacement. For example, the proximal portion of the stem is wider to help reduce the possibility of movement downward into the bone. The distal portion of the stem is shorter and features a narrower tip, making it easier to implant through the smaller incision used in the direct anterior approach. Lastly, the stem features an advanced surface texture of titanium plasma and a hydroxyapatite layer.
Verilast technology is a low-friction bearing couple combining Oxinium oxidized zirconium, a patented ceramicized metal alloy for the femoral head, and a cross-linked polyethylene (XLPE) cup liner for the acetabulum. During lab testing, Verilast technology demonstrated 67 percent less wear than the combination of cobalt chrome and XLPE. With the direct anterior approach, an incision is made on the front of the hip rather than the side or back. As a result, the surgeon can follow the natural spaces between the hip joint’s muscles and tendons, thereby minimizing the damage to the surrounding soft tissues. Because there is less soft tissue that needs to heal, patients undergoing direct anterior hip surgery reported less postoperative pain. Additionally, because the gluteal muscles and other natural stabilizers are left undisturbed during the direct anterior approach, it is possible for patients to regain mobility more quickly and ultimately go home from the hospital sooner.
Financial Details
For fiscal 2014 (ended Dec. 31), revenue was $4.62 billion, an increase of 2 percent on an underlying basis and 6 percent on a reported basis (2013: $4.35 million). Acquisitions added 5 percent to the reported growth rate, while currency was responsible for a 1 percent negative impact on growth.
“Our 2014 performance reflects the choices we have made to invest in transforming the growth profile of Smith & Nephew,” noted CEO Bohuon in a prepared statement. “We improved our existing businesses, driving a sustained improvement in U.S. hip and knee implants and building rapidly in the emerging markets. We strengthened our higher growth platforms, acquiring ArthroCare to give us a broader sports medicine portfolio. We created new growth platforms with the mid-tier portfolio and Syncera disruptive models that fulfill unmet customer needs, and advanced wound bioactives again delivered double-digit growth.”
The Advanced Surgical Devices (ASD) division delivered 2014 revenue of $3.29 billion, up 3 percent (2013: $3.02 billion).
Revenue was up 2 percent in the United States to $1.56 billion, flat in “other established markets” at $1.23 billion, and up 17 percent in the emerging and international markets to $511 million. All franchises contributed to improved performance with revenue growth in knee implants up 2 percent to $654 million; hip implants up 1 percent to $873 million; trauma and extremities up 4 percent to $506 million; sports medicine joint repair up 8 percent to $576 million; arthroscopic enabling technologies up 1 percent to $542 million; and other ASD (including ear, nose and throat and gynecology) up 10 percent to $147 million.
The Advanced Wound Management segment is grouped into disposable wound care products (Advanced Wound Care), electrical equipment for wound therapy (Advanced Wound Devices), and bioactives (Advanced Wound Bioactives). Sales for Advanced Wound Management delivered 2014 revenue of $1.32 billion, down 1 percent on an underlying basis (2013: $1.35 billion). For Advanced Wound Management, revenue was down 4 percent in the United States ($454 million) and 2 percent in other established markets ($699 million), and up 14 percent in the emerging and international markets ($166 million). Advanced Wound Care revenue was down 4 percent ($805 million). Sales of Advanced Wound Devices were down 9 percent ($192 million), impacted by the U.S. Renasys hold. Sales of Advanced Wound Bioactives, however, delivered strong growth, up 15 percent ($322 million).
Smith & Nephew temporarily ceased commercial distribution of its Renasys negative pressure wound therapy product line in the United States. This action followed instruction from the FDA to obtain new regulatory clearances through the premarket notification process with respect to certain design enhancements made to the systems.
Operating profit for 2014 was $749 million (2013: $810 million), reflecting acquisition costs largely relating to ArthroCare, amortization of acquisition intangibles, and legal and other items incurred. Profit before tax was $714 million (2013: $802 million).