Smith & Nephew Ripe for Takeover Bid say Analysts

As the market moves gradually toward more vendor consolidation, equity analysts say they would not be surprised to see Smith & Nephew pair up with another competitor

Debbie S. Wang 20 October, 2015 | 12:30PM
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Smith & Nephew's (SP.) impressive innovation has allowed the firm to carve out a slice of the orthopaedic and wound-care markets. Though Smith & Nephew is smaller than the dominant orthopaedic competitors, it has been a strong contributor in terms of introducing meaningful innovation. The firm pioneered hip resurfacing, which enlarged the patient pool by giving people in their late forties and early fifties an option to address their worsening hips instead of waiting until a full-blown hip replacement was appropriate.

The company's relatively small size could leave it vulnerable

Smith & Nephew pioneered its knee replacement with Verilast technology, which the firm contends can last for 30 years. Again, this technology helps Smith & Nephew attract younger patients, as well as any patients concerned about the prospect of revision replacement down the road. These are significant improvements that exceed the evolutionary innovation typically seen in orthopedics.

Nevertheless, over the long term, we think the company's relatively small size could leave it vulnerable as the hospital customer base seeks to consolidate vendors. Importantly, the firm's market share – about 11% of hips and knees – translates into a tenuous position. Share shifts in this market are glacial, at best, thanks to significant switching costs, and new technology does not necessarily trump those switching costs.

We note that Smith & Nephew's strong show of meaningful innovation discussed above translated into a mere 200-basis-point gain in share over the past seven years. This showdown between technical innovation and the stickiness of surgeon preference only underscores how difficult it is to induce practitioners to switch.

This dynamic and S&N's smaller user base mean the firm could find itself locked out of more hospitals and healthcare systems in the future. To accommodate as many orthopedic surgeons as possible, hospitals are more likely to stick with the larger brands that more orthopedic surgeons already use. As the market moves gradually toward more vendor consolidation, we would not be surprised to see Smith & Nephew pair up with another competitor, such as Stryker, Johnson & Johnson, or Wright Medical, in order to better compete.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Smith & Nephew PLC1,100.67 GBX0.84Rating

About Author

Debbie S. Wang  Debbie S. Wang is a senior analyst with Morningstar.

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