Medical Device Link.

Originally Published MX January/February 2005

COVER STORY

Interview by Steve Halasey

Generally speaking, institutions are like people: they become less limber with age. But don't tell that to Sir Christopher O'Donnell, CEO of Smith & Nephew plc (London), one of the world's oldest manufacturers of medical products. He's in the business of restoring people to activity—a talent that he has also brought to bear in keeping his 149-year-old company among the industry leaders in the fields of orthopedics, endoscopy, and wound management.

Sir Christopher O'Donnell, CEO of Smith & Nephew plc, on developing technology to improve life for patients and physicians alike. Photo by BILL ROBINSON

O'Donnell joined Smith & Nephew in 1988 as managing director of the company's medical division and was appointed to the board of directors in 1992. Since becoming CEO, in 1997, he has successfully restructured and revitalized the company, which is expected to report revenues of more than $2.4 billion for 2004.

In this interview with MX editor-in-chief Steve Halasey, O'Donnell discusses the commitment of Smith & Nephew to its mission of constantly making it easier for surgeons and physicians to fully repair patients' damaged tissues. Modest about the device industry services that won him a place in the Queen's honors list two years ago, he is proud of the contribution to patient well-being and surgical practice made by a revitalized company under his guidance. The conversation covers the company's strategy of organic growth and select technology acquisition, its focus on R&D and innovation in methods and materials, its close relationship with clinicians, and more.

MX: Smith & Nephew had been something of a sleepy UK company, but it has now emerged as an international player. What happened after you took it over?

Sir Christopher O'Donnell: I became chief executive officer about six years ago. At that time Smith & Nephew consisted of nine separate businesses, but only three of these were truly capable of competing on a global basis. Those were our businesses in implant and trauma orthopedics, endoscopy (sometimes known as keyhole surgery), and wound management. In these we had a strong proprietary position in terms of the technology and know-how, the business models were global in nature, and the growth prospects were good. Since I became CEO, we have divested the other six businesses in a variety of ways.

So our ongoing enterprise is set up with these three businesses, with the linkage between them being repair and healing of the human body, particularly body tissues. These businesses are tied together by their common interest in the research and development of products related to the repair of tissue that will enable people to recover their lost mobility and get back to their normal lives.

Smith & Nephew has divested a lot of businesses, but compared with many medical device companies, it has not been particularly acquisitive over the years. How do you decide what is a good acquisition target?

Well, we've done about 10 technology acquisitions over the past six years. For each of our businesses we look at the technology that we believe will be needed to drive growth in the future and to expand the markets. We also look, obviously, at the marketplace and try to identify any growth areas in which we are not participants. Then we try to focus our acquisition activities in those areas.

These companies that we have acquired have cost us anything from $10 million to $350 million. One we acquired this year, Midland Medical Technologies Ltd. (MMT; Bromsgrove, UK) with a unique, very strong position in hip-resurfacing technology, cost us $100 million plus milestone payments as we go along. This year we have also acquired two other companies, which are much smaller.

But we are not building our business entirely via acquisitions. Our base business model is organic growth driven by investment in R&D and by building up our selling and marketing infrastructure.

How do you value the strategic significance of Smith & Nephew's acquisition of MMT?

I'll answer your question perhaps a little more broadly, then come back to MMT. It relates to Oxinium, which is our unique proprietary material for joints implanted in both hip and knee.

Now, in the knee, Oxinium is actually becoming the product of choice for the younger patient. That category comprises patients that are, let us say, below the age of 60—in their fifties and maybe earlier ages. Joints are replaced, or typically had been replaced, only in patients older than 60.

With Oxinium, we introduced the first major technology that surgeons expect to last much longer, because it exhibits less wear (a primary contributor to the joint wearing out). Therefore, doctors are using it as the product of choice for younger patients, particularly in the knee. Using Oxinium in the hip, surgeons believe you may get longer life as well.

What the MMT acquisition brings us is both another advanced bearing material—it is a metal-on-metal bearing—and a redesign of the implant to make it much more stable. It is very suitable for younger patients.

A lot of funding has been going into orthopedic start-ups, and a fair number of takeovers have resulted. Do you see Smith & Nephew acquiring some of the smaller firms that are now coming to maturity?

We have a very active program of looking at the technologies we believe could be strategic in the future and the market positions that would strengthen our overall orthopedic business, and our other businesses, too. So we do look at an awful lot of companies. However, we would be unlikely to buy a company unless it really had something that was relatively unique and additive to our capabilities, or offered a market position that really helped us.

Organic Growth

Smith & Nephew's growth over the past couple of years has been very strong—particularly in orthopedics, but in other areas as well. The company spends about 6% of revenues on R&D. What key areas do you focus on funding?

The key area, particularly in 2005, is continuing to develop our franchise in advanced bearing materials for joints, specifically using Oxinium and the metal-on-metal bearing technology acquired with MMT.

We have also put a lot of R&D into trauma, that is, our products to get broken bones to heal. We are bringing some new locking compression plates to market in the first half of 2005, which we think exhibit some Smith & Nephew trademarks. They are very well designed, not just for bone reduction and good fracture fixation, but also in such a way, with their instruments, that it makes it easy for the surgeon to do a good, fast job on the patient. A trademark of our design is ease and speed in surgery, and we have brought that to the trauma market.

Smith & Nephew has done some interesting work on new visualization methods for endoscopy and on new connectivity methods for the operating room. How do you see that business growing?

I am very excited about that. It would be a business I would love to have a go at really driving hard into the marketplace.

We have come up with an excellent camera system. It is the most advanced medical camera. It uses progressive scan to build the picture up, and it is the only camera that does that. It gives much better definition. What we have done is put all-digital signal processing on it. There are huge advantages in utilizing this as an information source.

One has the impression that surgical navigation is a phenomenal growth area for endoscopy. And, of course, the connection to orthopedics is dead on. Is that your perception of the market?

Surgical navigation is very interesting. It is pretty well established in the spinal field. It is just starting to get some traction in the orthopedics field and also in certain specialized branches of endoscopic surgery. Not so much in arthroscopy; more in neurological and cardiac surgery.

So we have put a lot of investment into this. We now have several major partners. Most other people are working with one company. We are very pleased and proud that we are the only partner currently working with GE. I think that says something about how highly our concepts and programs in this area are rated.

"Our base business model is organic growth driven by investment in R&D and by building up our selling and marketing infrastructure."

Drivers of Growth and Profit

How do these fields of focus roll together to respond to what you see as major trends in the medical device sectors Smith & Nephew addresses?

What I see happening, across the whole world really, is the demand from the baby boomers who are reaching their late 50s now. They are in the prime patient category for orthopedic joints and are starting to fall into the category of age-related diseases that require advanced wound management.

The second driver is quality of life, not just for the baby boomers but also for people who are looking to maintain particularly high degrees of mobility.

But then, everywhere there are people asking "How can we pay for all of this?" Our part is to try to minimize the unit cost of the operational procedure; so, we spend a lot of time trying to make surgery easy and fast, because that generates a whole series of benefits that go to utilization of the operating room, moving particularly in arthroscopy toward day-surgery procedures, outpatient procedures.

The cost issue you mentioned obviously has some relation to what drives the company's earnings per share and profitability. Are there specific products you expect to be very heavy contributors to Smith & Nephew's profitability in the next year?

I think the ongoing rollouts of Oxinium and the minimally invasive joint surgery are going to be very, very helpful. Strongly gaining volume in wound management will drive the margins upwards. We have some very strong products in that sector that are growing rapidly. And obviously the camera system and visualization program mentioned earlier is the main driver in endoscopy. So we have a whole series of technology products that I think are going to drive real profitability.

Which Smith & Nephew products in the market now or that might be coming down the line do you think are most innovative, and will maybe show the way toward the future?

Oxinium, I think. I think also the MMT hip-resurfacing product, the new camera and visualization system, and two wound-management products. One of those is Dermagraft, which is our bioengineered human tissue particularly designed for diabetic foot ulcers, and the other is Acticoat, which is a nanotechnology product that contains silver at the ionic level. Acticoat is a wonderful wound antimicrobial that has been growing at 40 to 50% most of the past several quarters.

We plan to introduce a revision knee made out of Oxinium this year, as well as a new locking compression plating system in our trauma business. So, we have some very strong and innovative products. Most of them are protected by very strong intellectual property, and the balance by very, very strong manufacturing and technical know-how.

Smith & Nephew was the first company to have an implant with an antibiotic coating. Do you foresee that kind of combination product becoming more common in the orthopedic field?

I think we'll get to see combination, or drug-device, products moving out to a number of areas. With our silver antimicrobial dressing in wound management, there is no question the silver is having a ther- apeutic action.

Then there are products like our bioengineered human cell product, which is in the pharmaceutical category although it is actually applied to the device. The boundaries are getting blurred here. The drug-device products present wonderful opportunities for accelerated healing, but they pose some challenges at the regulatory level.

As well as at the business level. Is Smith & Nephew involved in working with biotech companies on projects that might lead to new methods of wound management?

In the case of our bioengineered cell product, we were working with a biotech company that was reasonably well known, called Advanced Tissue Sciences (La Jolla, CA). To cut a long story short, we ended up buying them because the investment levels required to bring tissue-engineered products to the marketplace needed a major company like Smith & Nephew. The results of that acquisition are the Dermagraft bioengineered human tissue and TransCyte, a human-fibroblast-derived temporary skin substitute that is used for treating very difficult burns.

So, Smith & Nephew, across the whole of the pharmaceutical, biotech, and medical device sectors, is the only company producing wholly human bioengineered products, which is quite extraordinary. We are absolutely at the forefront of this. We almost have a biotech wing of our company. It is a substantial lead, which we intend to exploit.

Marketing Challenges

You face some significant competition in the United States and abroad. What do you see as the key opportunities and challenges for the company in meeting that competition?

Smith & Nephew has always had outstanding technology, and ever since I took over as chief executive, we have continued to make investments in that. I think we are very effective at bringing the results to market. What we were not effective in doing was gaining share with them once we got them to market.

Therefore we have invested, and are continuing to invest, very substantially in building our sales force. We are building their capabilities in terms of training, in terms of experience, in terms of tools that they can use to gain share in their respective markets. Since the turn of the decade, we have doubled our global sales force. More than half of that force consists of orthopedics salespeople, with the balance being in endoscopy and wound management. Broadly, that reflects the structure of the business.

Is that predominantly in the United States, or are you exploring that kind of marketing and sales growth in other regions of the world as well?

We have focused particularly on the United States because it is the fastest adopter of innovation among the countries of the world, alongside Australia actually, so we have invested very strongly in those two markets. The next market of choice is Japan, where we are building our strength; that is a strategic target for us. We do add to our sales teams in other countries, but at a much slower rate than in those two principal target markets.

How do you see growth in the European Union (EU), and particularly in the new countries of the EU?

Growth in the mature countries of the EU, if you will, the traditional EU members, has been a bit slower in the past couple of years than it was in the previous half dozen. Serious measures are being taken to try to contain healthcare costs, and they are having some erratic effects, which is what tends to happen under those circumstances. So the growth rate there is not as high as it has been. Therefore, what we are typically doing is holding our sales force strength or making a few additions there.

In terms of the new countries, really, the level of development is such, and the age of the population is typically so much lower than in the more mature western European economies, that the opportunities for our products are not as strong. I think it will be some while before we make major investments in those countries.

Orthopedics salespeople have to work closely with surgeons both on procedures and products. How does the marketing effort lead Smith & Nephew into other areas of exploration, other sectors of research, and so on?

Well, we do a number of things. We have groups of surgeons who advise us on the things they think should be incorporated in the next generation of products within their area. We are also testing out the use of customer insight programs. It looks as though there are quite a few gains to be made in tailoring resources and solutions so as to provide benefits to hospitals and healthcare systems.

Do those sorts of explorations, or indeed your R&D efforts, lead you to investigate entirely new sectors of the industry that Smith & Nephew has not been in before, or do you feel that it is enough to do a good job in the three key areas?

No, we are going to focus on the three areas in which the growth rates are strong, where we have very strong proprietary positions. We may push out around the boundaries of those, but we are not about to go off into completely new areas.

"In the long term, 20 to 25 years out, it is hard to see that we will still be putting the same kind of very large metal pieces into our joints to replace their function."

Transatlantic Management

Smith & Nephew headquarters, a fair amount of research capability, and one business division are located in the UK, but the endoscopy and orthopedics operations are in the United States. What kinds of management challenges does that present?

Well, since this is a global industry, to some extent it almost does not matter where you are based. Executives need to be familiar with the opportunities, demands, and challenges in a number of global marketplaces, particularly the United States. So we have especially concentrated management effort and time on the United States in terms of both the quality and caliber of the management we have in our businesses there and the frequency of visits by me and other key head-office executives. It gives us a different perspective than most of our U.S.-based competitors have on how to deal with the rest of the world.

I think the UK has a particular advantage in terms of having a very good supply of scientists and engineers and the ability to maintain high-quality input on a relatively low-cost basis. So it is a fairly cost-effective place to do R&D.

Does straddling the Atlantic and having a good understanding of both EU and U.S. trends enable the company to respond more quickly to those marketplaces?

That is right, certainly. We need to be attuned to those markets, we need to be well established, and we need to make effective use of the feedback we get. We are well positioned to do so.

What kinds of international trends is Smith & Nephew responding to, or, do device companies in other sectors need to be aware of and respond to?

Well, I guess the most common one is a concern over the increasing cost of healthcare and the different ways that manifests itself. Second, there is increased regulatory scrutiny. That has possibly arisen from some of the widely publicized problems with pharmaceuticals, but more generally with the development of more-sophisticated products that do provide great benefit but sometimes will have a higher degree of risk, particularly if they are not correctly utilized. So it is incumbent on the industry to provide more education and training along with these products. We are responding to all of those trends.

A Look Forward

Looking into the crystal ball, what do you see as some key results of those trends 5 to 10 years down the line? Will we, for instance, see the long-predicted major influx of new products resulting from the human genome project, or new thrusts based on information technologies in healthcare?

At the macro healthcare level I am not sure I am so well qualified to answer. But, regarding the areas in which Smith & Nephew is involved, I think we will start to see, sometime between 5 and 10 years out, some much more biologically active products in the fields of orthopedics and endoscopy, and increasingly so in wound management.

One of our own aims would be to try to find ways of interacting with cartilage biologically at the time it is first damaged such that the onset of subsequent osteoarthritis is reduced.

But the time frame is really quite long. There are a lot of regulatory challenges to meet, there are a lot of technical challenges to meet, but I think we are as advanced as any company in the world in that sector. I think we will see some simpler ways of doing that, maybe within the five-year time horizon, something like very-high-performance bioabsorbables.

That is an area in which we are working. The bioabsorbable material actually will perform structural work and then allow the original type of tissue to grow back and re-form. Maybe there are ways we can do that by providing some acceleration of that grow-back phase. We are looking at those. Can we do it noninvasively? Can we do it by the nature of the materials we choose? And then, obviously, can we use either cell-based products or combinations of cell-based and other products? Because in the long term, 20 to 25 years out, it is hard to see that we will still be putting the same kind of very large metal pieces into our joints to replace their function.

One would expect to work on this over a long period of time, not just in terms of innovation, but in terms of regulatory affairs, and prove-out, and trials. Any of these things generally takes a five-year period because you have to do a pilot study, and then you have to do a pivotal trial, because it is a product of that nature, and you need two-year follow-ups for an orthopedic trial. So we are talking a pretty long time scale. But we are looking at all sorts of ways to provide simpler and more-effective treatments that might genuinely repair rather than replace body tissues.

Copyright ©2005 MX