London-based Smith & Nephew plc expects to become increasingly active in terms of M&A as it looks to continue its turnaround. This prediction was made during an earnings call last week, as Namal Nawana, Smith & Nephew's CEO and executive director, said the company realized $4.9 billion in revenue last year.
Nawana joined the company as CEO in the spring of 2018 after serving as CEO of Alere Inc. Now, his new company experienced 3 percent underlying revenue growth in the third and fourth quarters. "We start 2019 with a strengthened organization and a new growth-oriented operating model," he explained.
Of note, adjusted earnings per share came in at $1.01, representing a 7 percent improvement over the prior year. "The second half of 2018 was a solid start towards our goal to accelerate our top-line growth and deliver that growth sustainably with consistent margin expansion," Nawana said.
At the same time, geographies showed varied results. China and Latin America stood out, with growth in the teens in the three core franchises. However, he highlighted Europe as an area of weakness, coming in at minus 1 percent for the quarter. "The decline in our U.K. business moderated in the quarter, and we've now appointed new leadership in Germany, which is another market that we've highlighted as a challenge."
Related to challenges and opportunities in the various regions, Nawana told BioWorld MedTech during the J.P. Morgan Healthcare Conference in San Francisco last month that he is pleased with the progress his company has made recently, highlighting the U.S. team. He acknowledged the softness in Europe, adding that some markets take longer to remediate than others. Part of the change will relate to leadership and a new business model, he said, adding that for the first time, Europe is directly represented on his executive team as part of this change.
During a presentation at that meeting, he noted that under the new structure, the Europe, Middle East, Africa and Asia-Pacific regions are represented directly on the executive committee. The company debuted an operating model as of Jan. 1, led by an enhanced leadership team.
Focus on M&A
With this new model in place, the company expects to make additional acquisitions. "In terms of the environment, we have to work hard to find the right assets at the right price," Nawana said in response to an analyst question about M&A. His response came just weeks after the company closed its acquisition of Menlo Park, Calif.-based Ceterix Orthopaedics Inc. The company reported the buy as 2018 wound down. (See BioWorld MedTech, Dec. 24, 2018.) The company paid $50 million and may include up to a further $55 million over the next five years, contingent on financial performance.
Smith & Nephew sees a great opportunity with Ceterix. "It's a line extension for us," Nawana told BioWorld MedTech last month. "We're probably the leader in meniscal repair. For our customers to be able to treat more types of injury really helps save . . . meniscuses."
Moving forward, "we are looking at a lot of different tuck-ins and even bigger deals," he added. "M&A has been probably a smaller part of Smith & Nephew's life in the last few years than our competitors," he said. He declined to provide specific timelines, but noted that the group already has had a good look at what is out there.
The focus on M&A and internal product development is part of one of the company's strategic imperatives – namely, expanding in high-growth segments. "The value-creation potential from bolt-on deals, like Rotation Medical and our Regeneten product and now also Ceterix, is very clear," Nawana said during the call. "And we're now scaling up our manufacturing and in the process of rolling out Novostitch Pro firstly to our U.S. sales force and then beyond."
The other imperatives are achieving the full potential of its portfolio; transforming its business through enabling technologies; strengthening talent and capabilities; and becoming the best owner of its business.
Looking deeper at individual franchises, the company grew by 3 percent globally in reconstruction, while knees also jumped 3 percent. The company credited growth to performance from Journey II, Anthem and the Legion Revision System. Annual global knee sales exceeded $1 billion for the first time.
Hips also saw strength, with more in the pipeline.
During the call, Kyle Rose of Canaccord Genuity asked about knees and market share against a backdrop of product introductions. Nawana acknowledged that competitor Stryker was doing well with knees, particularly with robotics. But Smith & Nephew is seeing success in this area, too. "[W]e had good performance with our robot. And in the course of 2018, we are now training our workforce better, which is why this is important."
Robots are of particular importance to the company. Nawana told BioWorld MedTech that in the U.S., there is a shift toward the ambulatory surgical centers, and robotics can play a role in these facilities. The company said the Navio surgical system features technology that integrates hand-held robotics with CT-free registration and a patient-specific planning process.
In sports medicine and trauma, the company experienced 3 percent growth, with joint repair jumping 9 percent. Regeneten for rotator cuff repair doubled, exceeding expectations. The company expects to launch outside the U.S. this year.
While many areas were strong, arthroscopic enabling technologies fell by 4 percent. "The team is focused on remediating performance, and product launches in 2019 are a key part of that," Nawana said. An example is the Flow 90 Wand, which is being unveiled in certain markets outside the U.S. "[W]e've just last week received the 510(k) approval to enable us to begin our launch in the U.S. in Q2. So Flow 90 will enable our WEREWOLF technology to expand to the shoulder, and that is, of course, the largest area of use for Coblation technology."