Smith & Nephew on Thursday set out how it plans to drive double-digit growth of the orthopaedic assets it's acquiring from Integra LifeSciences for $240 million, a deal announced late last month.
Smith & Nephew CEO Roland Diggelmann made the pitch during a quarterly earnings call, touting how the ability to sell the acquired extremities devices through existing channels, coupled with the effect of the anticipated 2022 launch of a new shoulder replacement system, will support growth.
- Diggelmann made the comments in conjunction with the release of Smith & Nephew’s third-quarter results, in which it confirmed preliminary numbers it shared weeks ago and expanded on the headwinds and tailwinds faced by its business.
Smith & Nephew is moving deeper into turf fought over by companies including Zimmer Biomet and Stryker target Wright Medical through the planned acquisition of Integra’s extremity orthopaedics business. The commercial landscape means Smith & Nephew will face competition as it tries to grow above the market rate, which it pegs at 6% in the U.S.
Diggelmann said Smith & Nephew expects to “drive double-digit revenue growth for the acquired player.” Smith & Nephew reached that conclusion after weighing the merits of expanding into the upper extremities market for some time.
“You probably heard me earlier, or in the past as well, talk about complementing our strong reconstruction business with upper extremities and notably with the shoulders, so we've been looking at the market for some time. We always felt this would be very complementary to the portfolio,” Diggelmann said.
The acquired assets are “clearly accretive” to Smith & Nephew’s weighted average market growth rate, Diggelmann said, and could benefit from being part of the company’s portfolio.
“As with many of our tuck-in acquisitions, we have the ability to sell the acquired portfolio through a significantly wider reach of channels than it's being sold through today,” Diggelmann said.
Diggelmann highlighted the acquired foot and ankle assets, areas where Smith & Nephew is already active, as another driver of the deal. The Integra assets include a commercial sales force in the U.S., plus distributors in Europe and the rest of the world, that Smith & Nephew sees opportunities to leverage.
Despite those near-term opportunities, Smith & Nephew expects the deal to take five years to deliver a return on invested capital that exceeds its weighted average cost of capital. As an analyst on the conference call said, that is a year or two longer than Smith & Nephew typically takes to deliver a return on investments in M&A.
Diggelmann said expectations of a longer wait for a return on investment reflect that, while the Integra assets have a commercial component, the takeover is also a technology play. “Typically acquisitions in technology probably take a bit more time to [deliver a] return on investment,” the CEO said.
The biggest hope in the pipeline of acquired pre-authorization medical devices is a next-generation shoulder replacement system that Smith & Nephew plans to bring to market in 2022. Launching that device is expected to boost Smith & Nephew’s efforts to get double-digit growth out of the acquired assets.
As for the Integra end of the deal, Jefferies analyst Raj Denhoy wrote in a note following Integra's earnings call Wednesday morning that "In divesting extremities to SNN, IART throws in the towel on a long tough battle to drive better growth out of the segment." Denhoy added that Intregra "doesn't seem keen to add another leg to replace extremities and is instead targeting mostly tuck in deals though something larger hasn't been ruled out.
Smith & Nephew shared details of its plans for the Integra assets alongside an overview of its third-quarter financial results. As previously reported, the return of elective surgeries in the quarter enabled Smith & Nephew to stem the double-digit losses it suffered earlier in the year.
However, the market dynamics continue to change and vary from market to market. While the U.S. returned to growth, continued weakness in the U.K. dragged on sales in other established markets.