Olivier Bohuon insists Smith & Nephew can prosper on its own - http://on.ft.com/1ZrGv21
Is Smith & Nephew the one that got away? The UK medical device maker has long been seen as a potential target for bigger US rivals. But after 18 months of feverish dealmaking across the healthcare sector, the 159-year-old company is still proudly clinging to its independence.
Olivier Bohuon, S&N’s chief executive, says in a Financial Times interview that the speculation is unwelcome. “It has disrupted our sales force because every day they are with [competitors] who are saying, ‘By the way, we are going to buy you’.”
Analysts say a bid for S&N remains a possibility. As the fourth-biggest maker of hip and knee implants it could be an attractive prize for Stryker or Johnson & Johnson after Zimmer seized leadership of the market last year with its $13.4bn acquisition of Biomet.
However, Mr Bohuon insists he has not wavered from his belief in S&N’s ability to prosper on its own. The 56-year-old Frenchman has been steadily reshaping the company since taking charge in 2011 with a mission to reduce dependence on slow-growing US orthopaedics sales.
There has been heavy investment in emerging markets such as China and Brazil where he says ageing populations and growing middle classes represent “a huge reservoir of opportunity” even if recent economic turbulence has dimmed the short-term outlook.
He has also sharpened focus on faster-growing businesses in the developed world. The $1.7bn acquisition of Texas-based ArthroCare last year made S&N the number two supplier of devices for minimally invasive surgery and joint repair — a business known as sports medicine.
Meanwhile, the company once best known for Elastoplast bandages remains number two in wound care products. “I don’t like it when people call us a hip and knee maker — not because I don’t like hips and knees but because we are more than that,” says Mr Bohuon.
Growth businesses — defined as those with revenue increasing by at least high-single-digit percentages — accounted for over half of S&N’s $4.6bn sales last year, up from a third when he took over. Costs are also being cut with an aim for $120m of annual savings by 2017.
The investment involved in this upheaval has so far limited the rewards to shareholders. Sales rose 4 per cent in the first half of this year and earnings by 3 per cent. But Tom Jones, analyst at Berenberg, says the company is “on the cusp” of faster growth.
For all the talk of diversification, much still depends on S&N’s ability to compete in orthopaedics. To do this Mr Bohuon is experimenting with new business models, such as a “no-frills” service called Syncera which aims to strip away marketing and distribution costs by selling online rather than through sales people. This allows S&N to cut prices without sacrificing margins.
A similar economy model has been introduced in emerging markets such as China where growing middle classes and expanding public health systems are looking for high quality but affordable devices. “Yes we are the number four player but the strategy is one of disruption in products and models,” he says. “I don’t see any sign of weakness because of size.”
In other areas Mr Bohuon says greater scale would help and indicates that acquisitions are likely. He is “hungry” for expansion in wound care and in so-called trauma products, such as plates and screws to fix broken bones.
But will S&N continue to escape its own potential predators? Stryker admitted last year that it had considered a bid and Mr Jones says the rationale for such a deal was “obvious”. Together, the pair would leapfrog J&J in orthopaedics and become market leader in sports medicine.
J&J, meanwhile, has signalled its appetite for deals to absorb some of its $34bn cash pile.
Shares in S&N are down 5 per cent so far this year but up 60 per cent since Mr Bohuon took over, giving the company a market capitalisation of almost £10bn. That is less than half the size of Stryker’s and 6 per cent of J&J’s.
Mr Bohuon questions what further consolidation of the sector would achieve. Zimmer and Biomet will cut costs by merging, he admits, but adds: “Will they grow their top line? I bet it doesn’t work.”
A veteran of the pharmaceuticals industry, he experienced a big merger while working for SmithKline Beecham when it combined with Glaxo Wellcome in 2000. “I’ve lived this, I’ve heard the messages,” he says. “And 15 years later?” He is too diplomatic to state his implicit conclusion that the deal failed to live up to its billing.
There was speculation Mr Bohuon might return to pharma when Sanofi, the French drugmaker, was looking for a new chief executive earlier this year. He does not quash the idea it was a possibility but says: “I was in the middle of a journey here at Smith & Nephew and there is a lot more to do.”