Are you a buyer or a takeover target? That is the question medical device makers are having to ask of themselves following a period of intense consolidation. Deals such as Johnson and Johnson’s $21.3bn (£16.2bn) acquisition of orthopaedic company Synthes in 2012, or the $14bn merger that created Zimmer Biomet in 2014, have put pressure on companies to increase their scale and efficiency. Those unable to expand are likely to get left behind.
That is why woundcare specialist Smith & Nephew (SN.) has drawn ire from outspoken fund manager Paul Singer, founder of US hedge fund group Elliott Management. The activist investor – which is rumoured to have taken a stake in the UK-listed company – has suggested that Smith & Nephew would be a more attractive acquisition target if it spins out some of its divisions.
But management seems to have made the decision to be a buyer rather than a target. In late October, the group acquired shoulder repair specialist Rotation Medical for a potential total payment of $210m. The new company – which owns highly innovative shoulder surgery technology – will “accelerate the transformation of Smith & Nephew to higher growth”, according to the outgoing chief executive, Olivier Bohuon.
Alone, Smith & Nephew appears to be holding its own in the fiercely competitive market. Sales grew 3 per cent year on year to $1.2bn during the three months to September 2017, driven by an acceleration in emerging markets. The group managed to outpace growth of the wider medical devices industry, which was hampered by global natural disasters and price cuts in India, according to Mr Bohuon.
But analysts on the group’s conference call expressed concerns about the cost of this top-line growth. Smith & Nephew is currently trying to “realise further efficiencies and savings” or – as Tom Jones from Berenberg puts it – undertake its fourth efficiency programme in 10 years. Margins are not disclosed in quarterly numbers. However, Smith & Nephew is under pressure to report strong bottom-line growth at the full year, after six consecutive years of like-for-like pre-tax profit and earnings declines.
