Smith & Nephew's new chapter

*Converted to £. Source: Bloomberg

Mr Nawana's CV suggests he may be just the right person to reinvigorate the group. He was instrumental in turning around the performance of spinal implant group DePuy, and before joining Smith & Nephew had success in focusing the operations of Alere before overseeing its sale to Abbott Laboratories for $5.3bn (£4.1bn) in 2017. The experience at Alere looks particularly relevant given that many believe the sprawling nature of Smith & Nephew's operations are at the heart of the problems. And in another parallel with Alere, Smith & Nephew has long been viewed as a bid target for larger rival Stryker. Mr Nawana's experience with US healthcare markets should also help, given Smith & Nephew generates half its sales there.

Full-year numbers suggest Mr Nawana may already be having a positive influence. Underlying revenues – excluding currency movements and the impact of acquisitions – were up 2 per cent, while underlying trading profit margins expanded from 22 to 22.4 per cent (22.9 per cent including the benefit of a one-off legal settlement).

Importantly, there was an acceleration in growth between the first and second halves of the financial year from 1 per cent to 3 per cent. True, there is still a long way to go. While the reconstruction division (one-third of sales) saw growth from both its units – hip and knee implants – at the sports medicine and trauma division (two-fifths of sales), some of the progress was offset by a poor showing by its arthroscopic-enabling technologies unit, where revenues fell 4 per cent. Meanwhile, woundcare (26 per cent of sales) saw some weakness in advanced wound bioactives, where revenues fell 3 per cent. Encouragingly, Mr Nawana believes these weak spots can be addressed. For example, the launch of a new shoulder repair surgical wand in the first half of 2019 should help buck up arthroscopic-enabling technologies sales, while the recent removal of a boxed warning by US regulators on the group’s ulcer treatment, Regranex – which sits in the advanced wound bioactives portfolio – should pave the way for a more successful relaunch of this product.

While the sale of non-core businesses could be one option for improving underlying growth and profitability, so far Mr Nawana has expressed more enthusiasm for addressing the issues by scaling up the business through acquisitions. Recent rumours of a potential bid for $2.7bn spinal surgery specialist NuVasive would, were they substantiated, mark a major step in this direction. Neither board has commented on the speculation, but Mr Nawana has said he’s prepared to target net debt of between 2 and 2.5 times cash profits (Ebitda) in the near term, compared with 0.8 times based on net debt of $1.1bn at the end of 2018. The presence of Elliott on the shareholder register should provide a useful check on any attempts to build scale that doesn't appear to chime with the aim of boosting margins and top-line growth.