Why the flu season has helped leave Smith & Nephew feeling cold

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With the population ageing in most rich countries round the world, these should in theory be bumper times for Smith & Nephew, Europe’s largest maker of artificial knees, shoulders and hips.

Unfortunately, the company – a member of the FTSE-100 since July 2001 – has today disappointed investors, warning that it expects sales to grow this year by between 2-3%. That is down from the 3-4% growth to which it was previously pointing the market.

The shares have fallen 7% on the news.

That may seem somewhat aggressive until you bear in mind that, from the beginning of February to the close on Wednesday evening, the shares had surged by more than 15%. Expectations have been running high.

It’s a disappointing last trading update for Olivier Bohuon, who steps down as chief executive on Monday, although in his defence, the Frenchman – a pharmacy graduate – can point out that he has doubled the share price since he took the job in 2011.

He reflected today: “It’s been a challenging quarter and a disappointing one, in financial terms, for my last quarter as chief executive. However, I see this in the context of the last seven years.

“I wish I could have left the company with a better quarter than this one, but I have learned Smith & Nephew should not be judged on just one quarter.”

So what’s gone wrong?

A couple of factors. One is that Smith & Nephew is seeing weakness in a product area for which it is slightly less well-known – advanced wound management, which supplies ointments, bandages and dressings to healthcare suppliers.

Sales in bioactives, which help in the treatment of particularly difficult wounds such as burns, were down 12%. Mr Bohuon blamed this partly on tough competition and pricing pressure.

Olivier Bohuon has been chief executive of Smith & Nephew since 2011. Pic: S&N
Image:
Olivier Bohuon has been chief executive of Smith & Nephew since 2011. Pic: S&N

The other is that, in developed markets, there was a delay to knee and hip replacement operations – partly due to changes in US healthcare insurance, partly due to the weather and partly due to funding pressures on the National Health Service.

Mr Bohuon explained: “They closed many centres during the flu season. We have heard also, and no doubt you have heard, that the NHS has decreased the number of procedures. That impacts sports medicine big time, but also reconstruction, there’s no doubt about it.”

As he bows out, though, Mr Bohoun can reflect on the reconstructive surgery he has carried out on the venerable old business founded by Thomas James Smith from a small pharmacy in Hull in 1856, taken on by his nephew Horatio Nelson Smith and which went on to launch Elastoplast in 1928.

He has won respect from investors and analysts not just for the way he has simplified the business, previously something of a conglomerate, but also for the way he stayed at the helm when he was receiving chemotherapy for his cancer in 2016.

Mr Bohuon said today: “When I joined Smith & Nephew, it was a collection of a business units, each operating in their own independent silo. Today, we are one Smith & Nephew, with an integrated business model and strategy.

“We have made successful acquisitions, moved into new areas like robotics and prepared the business for the challenges and opportunities ahead. It has always been important for me to leave a stronger company for the new CEO.

“We have modernised a very old organisation, have decided to focus on true innovation and drive efficiencies.

“I’m very confident that the dynamic is there. We’ve had a bad quarter, fine, but that should not hide the last seven years and the future of this company, which is absolutely superb.”

Asked whether growth in the business had fallen short of his expectations, Mr Bohuon admitted all the changes he had made had caused disruption to the business, the impact of which he had underestimated.

The question is what happens from here.

The activist investor Elliott has taken a 2% stake in the business and has been agitating for Smith & Nephew, which has 1,550 UK employees including 300 in Hull, to break itself up.

Takeover speculation is also never far away: although Smith & Nephew is a £12bn business, it is relatively small compared with other operators in the orthopaedic space, such as Zimmer and Stryker. The latter, which is valued at $62bn, looked at bidding for Smith & Nephew four years ago.

And there have also been grumbles from some investors that the company’s overheads are too high and that it has spent too much on research and development.

Fending off those questions now falls to Mr Bohuon’s successor Namal Nawana, who spent 15 years at Johnson & Johnson, another of Smith & Nephew’s competitors.

It will be interesting to see whether he sticks to Brittany-born Mr Bohuon’s mantra: “It’s important not to be big, but to innovate.”



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