Sunday 15 December 2019

Smith & Nephew shows ambition with acquisition of American ArthroCare

Close up of an ArthroCare product called the ArthroWand
Close up of an ArthroCare product called the ArthroWand

John Lynch

For many of a certain age the word 'hip' has changed its meaning. One time it was something we all wanted to be; it was 'cool', smart and 'state of the art'. Unfortunately for some of us hip has begun to mean something that might soon have to be replaced. However, I am happy to reveal this morning that I have found the company that combines 'hip' and hips. It is called Smith & Nephew (S&N) and has recently been named by 'Forbes' magazine as one of the "most innovative companies in the world".

S&N is a UK-based global medical technology company. It is also Europe's biggest manufacturer of artificial joints and a world leader in replacement hips. It has worldwide sales of $4.3bn (€3.1bn), employs 11,000 people, sells its products in 90 countries, and has 10 manufacturing plants around the globe.

The company became a household name in 1928 when it introduced Elastoplast, a product that has never since dropped off the 'must have' list in medicine cabinets around the world.

Today S&N business is mainly concerned with the replacement of joints for the knee and hip, and 'wound management' (that's treatment of hard-to-heal wounds to you and me). It is also involved in trauma and clinical therapy, and in minimal invasive surgery of joints (including shoulder) used in sports medicine.

An advanced diploma in first aid or membership of St John's Ambulance service would be a distinct help in interpreting the S&N annual report but a key subsidiary is called Advanced Surgical Devices (ASD). This division contributes $3bn (€2.1bn) to total sales and $620m (€452m) to operating profits. Hips and knees account for almost half of surgical devices turnover, followed by sports medicine and trauma which contribute sales of $0.5bn (€365m) each.

Advanced wound care is the smallest division with sales of $1.3bn (€949m) and operating profits of $190m (€138m) down 8pc on the previous year.

In recent years S&N has been reshaping and rebalancing its business. It has been diversifying into faster growing areas to compensate for weak demand of its joint replacement business. Recently it agreed to buy ArthroCare, a US sports business for $1.7bn (€1.2bn). This is the company's second American deal in a couple of years, it previously bought Healthpoint, a US wound Care operation and the two businesses give S&N access to growth markets in the US.

The company has also been active last year in the so-called 'emerging markets', acquiring a trauma business in India, and a wound management business in Brazil and Turkey. (As a diversion from the business in hand, I think it is patronising to refer to 'emerging markets' anymore. If they were ever hidden they have now well and truly emerged. In future we will refer to them as developing markets).

S&N derives most of its revenue ($3.8bn or €2.7bn) from Old World markets like the USA, Europe and Japan. Progress in the US helped drive surgical devices sales of joint replacement and sports medicine. Meanwhile, Europe has been flat. The company was active in China, India, Russia and Brazil with sales there now accounting for 15pc of group revenue.

Though headquartered in London, S&N reports in dollars and its shares are quoted in sterling. Last year total revenue was up 4pc on the previous year, and the group had operating profits of $810m (€591m). A strong generator of cash, it spent $226m (€165m) last year on its share buy-backs. Not surprisingly the latest acquisition spree has put buy-backs on the back burner. However, S&N has a very long track record of creating value for shareholders paying a dividend every year since 1937.

The recent repurchasing of shares, along with dividends resulted in a total distribution to shareholders last year, of $460m (€335m). S&N is in the middle of a five-year programme aimed at saving $150m (€109m) per annum in costs and it's on target. The company is valued at £8bn (€9.8bn) and has a high price earnings ratio of 25. Its share price of 927p is up 28pc on the year, reflecting an improvement in its main market Europe and hips (surgery) is back in fashion. All good news for S&N?

Nothing published in this section should be taken as a recommendation, either explicit or implicit, to buy or sell any of the shares mentioned.

Irish Independent

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