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November 28, 2012 3:26 pm
The medical term is “minimally invasive”. It applies both to Smith & Nephew’s products – which include keyhole surgery tools – and to its acquisition strategy. The purchase of Healthpoint Biotherapeutics for around $800m on Wednesday is a case in point. Wound management represents about a third of the medical device group’s business, but it is weak in a key growth area – bioactive components. Healthpoint will address that. At more than four times projected sales, it is not cheap. But S&N’s first big purchase for years addresses at least some of the group’s operational weak spots.
S&N’s operations are split three ways – knee and hip implants, sports medicine and trauma, and wound management. Each has about a third of group revenue of $4.3bn in 2011. The first of these is low-growth, and S&N keeps bumping into the unmistakable bulk of Johnson & Johnson in the sector. Chief executive Olivier Bohuon has been looking to boost S&N in the other two. Privately owned Healthpoint is a step in that direction. Its main product is Santyl, an ointment for treating wounds, and it is a leader in the $1bn market for so-called bioactive wound care. With a 2011 trading profit of $11m, Healthpoint is small, but revenue is expected to jump by a quarter to $200m in 2012.
It will need to achieve that sort of growth to justify the price. S&N says the deal will exceed its cost of capital in the third full year after acquisition, and there are modest cost synergies – $20m annually by 2015. That amounts to $140m, taxed and capitalised. But future growth will depend on the success of a new leg ulcer treatment, which is itself dependent on heavy research and development spending and clinical trials. That adds a degree of risk that is relatively new to S&N. But it is the sort of risk built in to its strategic aim of cementing its position in markets such as the US.
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