EUR 850.00 For Business Accounts Only

Morningstar | Smith & Nephew Climbs the Value Chain Under New Management

While we continue to think Smith & Nephew faces key challenges in remaining an independent, mid-sized company in a medical technology world that has come to reward consolidation and scale, we like the steps new CEO Namal Nawana has taken to broaden the firm’s product portfolio into adjacent and complimentary markets. These additions do not necessarily widen Smith & Nephew’s narrow economic moat, but they help to reinforce the firm’s competitive position in advanced wound care, in our opinion. Our fair value estimate is unchanged.

We like the addition of Osiris Therapeutics’ range of bone grafts, cartilage, and skin substitutes as well as the acquisition of Leaf Healthcare’s patient monitoring system that alerts practitioners to pressure ulcers. These products move Smith & Nephew into new niches that coordinate well with the firm’s presence in foam, silicone, and anti-microbial dressings. Importantly, we think these purchases provide an opportunity for the firm to flex some pricing power. The traditional AWC portfolio is often sold through group purchasing organization contracts, and consolidated GPO buying power means heightened price competition by the manufacturers. On the other hand, the more highly engineered skin substitutes can be more differentiated, which allows Smith & Nephew to approach hospital systems and integrated delivery systems individually. This approach is more marketing-intensive, but we’ve seen it work at Stryker and Coloplast.

If Smith & Nephew can compile performance data, it could make a compelling case for how these new products could help customers improve outcomes and/or lower costs. In particular, we think Leaf’s monitoring system holds potential, as Medicare estimated a pressure ulcer added more than $43,000 to a hospital stay in 2007. With reduced reimbursement for this complication, hospitals are looking for preventative solutions such as Leaf.