Three major investors are calling on Smith+Nephew to explore breaking up parts of its business with a focus on potentially spinning off its orthopedics division, Financial Times reports.
The shareholders, who rank among the company’s top 20 investors, told the Financial Times that Smith+Nephew should divest its orthopedics unit if it fails to show significant improvement. Two investors suggested that a private equity buyer could be interested in the orthopedics division, the largest revenue generator among Smith+Nephew’s three business segments. One investor described a potential sale as “quite compelling” given the division’s recent struggles.
Smith+Nephew’s shares have declined by over 13% since late October, when it revised its growth forecast downward for the year, citing declining sales in China due to changes in procurement policies. The company also projected ongoing challenges into 2025. However, with China representing only 5% of the company’s sales in 2023, shareholders argued that broader issues, including a loss of U.S. market share, are contributing to the company’s woes, Financial Times reports.
Earlier this year, Swedish activist investor Cevian took a 5% stake in Smith+Nephew, expressing concerns over the company’s failure to generate shareholder value despite what it termed “fundamentally attractive businesses.”
The orthopedic company’s performance has been marked by modest growth in recent years. Smith+Nephew’s stock (NYSE:SNN) grew 1.5% in 2023, according to a MassDevice analysis of the largest medtech companies’ stock performances. However, SNN shares have dropped by more than 40% in the past five years, set back by executive turnover and challenges within the orthopedics division.
The revenue growth of Smith+Nephew’s Orthopedics and Sports Medicine businesses has lagged behind that of many of the world’s largest orthopedic device companies.
CEO Deepak Nath, who assumed his role in April 2022, has launched a 12-point plan to improve Smith+Nephew’s performance by 2025. His plan includes initiatives to strengthen the company’s supply chain and introduce new orthopedic technologies to reclaim market share. Nevertheless, some investors expressed concerns over what they perceive as a lack of urgency and openness to alternative solutions, such as spinning off the orthopedics unit.
The Financial Times reported that an anonymous investor characterized the orthopedics division as “the problem child” and suggested it may perform better under different ownership if Smith+Nephew cannot enact a turnaround. Another investor highlighted the competitive challenge facing Smith+Nephew’s orthopedics unit in an “oligopoly” where its research and development budget is relatively smaller than its competitors.
Despite the mounting calls for a split, one fund manager expressed skepticism, arguing that orthopedics remains a cash-intensive business that depends on the revenue streams from Smith+Nephew’s sports medicine and wound management divisions.
