Smith & Nephew innovates in wound care, but no trade sale in sight

Innovation is crucial to a device maker’s prospects. One of the problems facing the US group Smith & Nephew, however, is that its core business is orthopaedics, specifically artificial hips and knees – areas in which very little technological advancement is possible.

So study data on Pico, a negative pressure wound healing device that is a meaningful growth driver for Smith & Nephew, could be good news. Unlike the more genericised basic wound care sector, home to companies such as Convatec and Coloplast, the advanced wound care business tends to see a great deal of innovation and competition.

S&N believes that it is at the forefront of this innovation, and its wound management business is one of its fastest-growing units. But the conflict between the large but slow-growing ortho unit and the smaller, nimbler wound care business could be a large part of why the company – long talked of as a takeover target – has not yet been bought.

Scale or innovation

“If you look at a hip replacement, they have something like 99.5% success rate. How can you improve on that?” asks Daniel Mahony, a partner at the investment group Polar Capital.

Mr Mahony says that, increasingly, medtech companies are seen as having two main routes to growing their businesses.

“A new broad investment trend is emerging – you either need to be an innovator, which tend to be small and mid-cap, disruptive, ripping things up, or you need to be a consolidator, which means becoming a top-three player and having thought leadership in the clinical area that you work in,” he says.

Wound care sector – top 5
Global sales ($bn)
Company 2016 2022e CAGR
Johnson & Johnson 3.7 4.4 +3%
Acelity 1.5 1.6 +2%
Smith & Nephew 1.2 1.5 +4%
3M 1.2 1.5 +4%
Coloplast 1.2 1.8 +7%
Source: EvaluateMedTech

S&N is the third-placed company in the wound care sector – but its ortho business, which brings in 41% of its revenues to wound care’s 26%, is only the fifth largest, after those of Johnson & Johnson, Zimmer Biomet, Stryker and Medtronic. It is also growing more slowly than the wound franchise.

Orthopaedics sector – top 5
Global sales ($bn)
Company 2016 2022e CAGR
Johnson & Johnson 8.8 10.3 +3%
Zimmer Biomet 7.3 8.9 +3%
Stryker 5.6 7.5 +5%
Medtronic 2.9 3.4 +2%
Smith & Nephew 2.0 2.4 +3%
Source: EvaluateMedTech

It became apparent that the company had missed out on a trade sale during the last wave of orthopaedics consolidation in 2014, exemplified by the $14bn Zimmer/Biomet and $3.3bn Wright Medical/Tornier deals, when furious rumours that Stryker was going to bid for S&N in 2015 came to nothing.

S&N did try to build scale itself, buying Arthrocare in 2014. But this has had little tangible impact – S&N’s share price was flat throughout 2015 and 2016 – and it remains dwarfed by other groups in the ortho space. This sector is already highly consolidated and the chance of further scale-building activity running into difficulties with the antitrust authorities is high. The merger of Zimmer and Biomet attracted the attention of the US Federal Trade Commission, which eventually allowed the deal to go ahead after divestments were made.

Instead of trying to consolidate, emphasising technological improvements in the faster-moving wound healing sector might be a better strategy.

Advanced

“It’s true that traditional wound care is a market that hasn’t had a lot of differentiation,” says Sandrine Letellier, global vice-president at S&N. But as patients age and see more comorbidities like diabetes and obesity, traditional wound care is not enough to meet their needs. And so, Ms Letellier says, “the advanced wound market is not commoditised at all, there is a lot of innovation”.

S&N’s Pico dressing was initially launched in 2011, but now, for the first time, the company has shown that it can improve patients’ outcomes if used preventatively. An independent randomised trial in 50 patients undergoing major abdominal surgery showed that applying Pico immediately after the procedure – as opposed to waiting until symptoms of poor healing develop – significantly reduced the rate of surgical site infections by 74% compared with standard care.

Thirty days after the operations, infection rates were 8.3% with Pico versus 32% in the control group, which was treated with standard wound dressings. Pico patients stayed in hospital for an average of 6.1 days, compared with 14.7 days for standard care.

The device is small by the standards of negative pressure wound systems, weighing 150g, Ms Letellier says. Like all negative pressure devices it uses suction to manage exudate – some wounds can generate up to a litre of exudate per week.

“When you apply suction to the wound, not only does it evaporate the exudate quicker and better, also the negative pressure stimulates the granulation tissue to grow faster,” she says. This latter effect accelerates wound healing.

Evidence that the dressing works in the preventative setting ought to improve sales of the device. “Pico is used in the indication of open wound therapy, but the new preventive usage of negative pressure is very new and was really initiated with Pico. It’s a new market to be created … and Pico is the best placed in this market. Do we expect this to increase sales? Of course,” Ms Letellier says.

Pico was already an important part of S&N’s businessand the company could secure its future by sharpening its focus onto this high growth, high innovation area.

“You could make the argument that maybe they should spin off hips and knees if there were a buyer, and focus on the faster growing bits,” says Mr Mahony. “That’s a punchy call for a CEO to make. A lot of cash flow comes from those legacy businesses.”

It is true that any acquisition would likely be driven by a buyer’s interest in S&N’s orthopaedics devices rather than its other technologies. But, without the scale to challenge the big players, and with little innovation possible in hips and knees, there is perhaps not a great deal Smith & Nephew can to meaningfully differentiate itself.

“You need to give people a vision of where the company’s going – where the growth rate is,” says Mr Mahony. “It’s as though what we’re being told is that more of the same is fine. My view is, well, the world around you is changing, more of the same is not good enough.”

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizVantage on Twitter

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