British orthopedic giant Smith & Nephew plc (NYSE:SNN) announced an ambitious plan to realign the entire company to focus growth on the emerging markets of Brazil, Russia, India and China, while creating a more streamlined operation in its existing markets.
Bouhon said the moves will be made with the intention of growing the company’s sales in the BRIC countries from $120 million to $500 million within the next five years, while investing $300 million in research and development and making some more aggressive mergers and acquisition moves in the company’s wound management business.
New SNN CEO Olivier Bohoun told investors today that in order to achieve the goals the company will be split into four operating units, combining its Memphis, Tenn.-based orthopedic reconstruction division and its Andover, Mass.-based endoscopy unit into a new division called the Advanced Surgical Devices Division. The company’s advanced wound management business will remain a separate unit. Both divisions will focus on the established markets of U.S., Canada, Europe, Japan, Australia and New Zealand.
At the same time, SNN will create a new division to focus solely on what Bouhon called the more established emerging markets of Brazil, Russia, India and China. This division will have some autonomy in that it will sell the company’s full suite of endoscopy, orthopedic and wound management products, as well as help drive R&D initiatives.
A fourth division will focus on international markets such Central and Latin Americas, Eastern Europe, South Africa, South Korea and Southeast Asia. While this division will mainly be served by distributors, Bouhon said management will focus on streamlining the number of distributors it uses, as well as examine and target market opportunities for investment.
The four divisions will each have a manager that reports to Bouhon directly. The company has already announced that SNN veteran Mike Frazzette will lead the Advanced Surgical Devices Division and Roger Teasdale will remain president of advanced wound management. The managers of the emerging and international markets have not been named and will not be named until September. Kelvin Johnson, is the current president emerging markets.
Bouhon said the timing was right for the moves because SNN is in a position of strength.
“We are in peace so its the right time to change,” he said. “You have one world but three markets. The established markets have issues with price structure and government issues. In these markets the growth is in the low single digits. I don’t forsee any big bump. Here the name of the game is not to surf on the market because there is nothing to surf.”‘
He added that price pressures in the established markets are “here to stay” and that the only way to grow in these businesses was to grab market share away from other competitors through better execution and innovative products. Bouhon said other challenges in the existing market included consolidations such as the $21 billion Synthes/JNJ merger.
The decision to consolidate the endoscopy and orthopedic businesses came from examining the company’s operations and seeing that there was too much overlap in the business.
“They do very well,” he said. “But you don’t see the duplication of efforts and processes. We had common customers [in both units] who do not talk to each other at all.”
Bouhon did not elaborate on how the company would deal with those redundancies, or if job cuts would come as a result of the combined units. Thus far, only orthopedic division president Joseph DeVivo, whose last day is today is out.
In the emerging markets, Bouhon said you could “surf the market and gain share,” easier, but that the name of the game was not to create expensive technology and sell it at a lower margin. Rather, you had to focus specifically on what those geographies needed and innovate based on those needs.
The moves come at an interesting time for SNN, which also reported a $236 million profit on $1.07 billion in sales, a 4 percent increase compared to the $226 million on $959 million in sales.
Sales in the company’s knee business actually grew by 10 percent during the quarter.