Other Articles

AAOS Political Action Committee
Active players in the orthopedic field know the importance of the AAOS Political Action Committee (PAC). On the cusp of hot topics affecting physicians and patients, the AAOS PAC works diligently to provide data to members of Congress and improve the present and future of orthopedics.

Who ARE These Guys?
Every 60 seconds or so a surgeon tears the cover off an Integra LifeSciences package. Quietly, this company has become the seventh largest medical implant manufacturer serving orthopedic surgeons in the world. Where to now? Would you believe $1 billion in two years? How about $2 billion by 2015?

Redemption in a Mechanism of Failure: The TOPS™ Story
Impliant’s TOPS™ System had a “squeaker” in its clinical study. After a voluntary suspension of the study by the company and finding the mechanism of failure, the FDA has approved a resumption of the study. What insider lessons were learned? Class starts here.

What Complaint is Numero Uno in the PearlDiver Database?
The answer may surprise you. Is it sore backs, aching hips, sore knees, fingers? PearlDiver details 3.8 million spine related complaints—complete with demographic information and charging information. But that’s not #1. PearlDiver also lists 3.5 million large joint complaints. Sorry, still not #1. What could the most common orthopedic complaint possibly be? To get the surprising answer…read on.

What the Knees Need: Baby Boomers and Their Options
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Physician: Report Thyself
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Revising the Statistics
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Where Is Ben Now? Trends in Venture Capital
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The Hounds of Wall Street
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The Era of “Tell Me Right Now” Dawns at FDA
The FDA wants the next phase of post-market oversight to change from self reporting to proactive surveillance. How? Through the Sentinel Initiative. Read what it means to device manufacturers here.

The Day After Tomorrow: Complication Rates and Instrumentation Trends in Posterior Lumbar Fusion
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You Try It. No You Try It First: New Technology Adoption
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Cheaper, Thinner, Faster, Stronger
In this, the second of our series of three articles on innovation, we tackle the question: How do you measure medical technology innovation? While difficult, measuring innovation is NOT impossible. Why? Well to start, and in the immortal words of Supreme Court Justice Potter Stewart, “We know it when we see it.”

SAS Crosses the Rubicon in Miami Beach
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Arthroscopic Treatment for Tennis Elbow: Coming on Strong
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Do Republicans Make Better Orthopedic Surgeons?
A recent Nature Neuroscience journal study of the decision making differences between liberals and conservatives appears to argue in favor of Republican surgeons! Which, frankly, explains a lot—to BOTH sides and, to stretch an analogy almost to its breaking point, it may also explain why McCain’s health care plan is different from Obama’s. Read OUR take here.

"Sound of Music" Turns to Greek Tragedy for Smith & Nephew
Smith & Nephew’s Swiss (mis)adventure with Plus Orthopaedics is turning into a Greek Tragedy. The company’s whole acquisition strategy is being called into question. Read how CEO Illingworth explained it to the brutal British press.

“Dear John Letter” for Hip Resurfacing?
“Dear John H. Resurfacing: I hope this little note finds you well. We certainly have had some great times and, gosh, I’ll never forget those wonderful moments when the FDA approved your PMA. We’ve just celebrated our second anniversary together and, well, I’m just not feeling the magic anymore….” Two years after FDA approval, how happy are orthopedists with hip resurfacing? Read our analysis here.

In the Beginning, There Was the End: Manuscripts 101
Dr. Paul Manske, Professor of Orthopaedic Surgery at Washington University School of Medicine in St. Louis and Editor-in-Chief of The Journal of Hand Surgery, shares his thoughts and experience on the details of shepherding a manuscript through publication.

Did ConMed Get Re-Wired?
Ever hear about the neurosurgeon who used an $80 Bosch power drill to do brain surgery? It really happened. Surgeons like their power tools. Increasingly they also like a particular line of sterilizeable power tools from ConMed’s Linvatec unit. Did ConMed get re-wired? We have the details here.

What was surely hoped to be the sweet "Sound of Music" from the Alps has instead turned into a Greek tragedy for Smith & Nephew (S&N).

In his first major challenge as the new CEO of S&N, David Illingworth had to announce on April 30 that the company's 2007 purchase of Swiss medical device company Plus Orthopaedics, for $889 million, was in 2008 going to cost S&N $100 million in unrecoverable revenues and cut profits by more than $25 million because of "unacceptable" sales practices uncovered in Greece (among other European markets).

Most of the “unacceptable” activity, about $60 million, appears to have taken place in Greece, where S&N has now virtually closed down its operations.

“We have taken prompt, decisive action to ensure that the sales practices we uncovered within Plus in continental Europe have been stopped, and this has impacted our performance this quarter and will continue to do so for the rest of the year,” said Illingworth in a statement released by the company.

Illingworth said that the investigation was not linked to surgeons receiving rewards from the company for using its devices. The company said that it did not expect to recover these lost revenues, but it claimed that the continuing growth of the business, including the rest of Plus, would be unaffected.

The company reported that a six-month internal probe had identified sales representatives who may have been accepting kickbacks from the sale of artificial joints.

"A large proportion of these customer relationships were lost," Illingworth said. The company stated that it was confident it knew what the issues were, and its internal investigation may be complete within a few weeks.

In a conference call with analysts on May 1, Illingworth said that the company had brought in outside legal and accounting help to aid the internal investigation. He also said that the company has taken some “actions” against employees and is considering options against the former owners of Plus.

Market Response and 1st Quarter Results

The market responded quickly and harshly. The stock of Europe's largest hip and knee maker got pummeled by over 13% on the same day it reported the quarterly results.

First quarter results weren't stellar, either.

Revenues grew by only 2% on a constant currency basis to $911 million for the quarter, $13 million below the consensus expectation.

S&N’s business segments grew revenues at the following constant currency rates:

• Reconstructive – 2%
• Trauma and Clinical Therapies – 0%
• Endoscopy – 4%
• Advanced Wound Management – 2%

Some analysts said the stock was hurt by weak margins in the wound management business related to new products in the United States and 11% growth in its key U.S. hip replacement business that was below analyst expectations of 16% growth.

Commenting on the first quarter, Illingworth said:

“Our performance in the quarter was mixed. While we are pleased with our performance across most of the business we did have one issue to deal with in the former Plus business in Europe. Our U.S. Reconstruction business continued to outperform the market, driven by our BIRMINGHAM HIP™ Resurfacing product; Endoscopy was robust with a particularly good performance from Europe; in Trauma our European business performed well and we are re-energizing our U.S. business. In Advanced Wound Management, we have successfully launched our Negative Pressure Wound Therapy system, and I am confident that we have a very competitive product to address this significant market.”

British Press Frenzy

But it was the unexpected discovery of Plus' former business practices and the original decision to acquire Plus that set off some English press in a frenzy of second guessing and recriminations. In the best tradition of the raucous and insult-hurling debates in Parliament's House of Commons, the criticism was blunt and relentless.

Patrick Hosking, writing in The Times on May 2, 2008, said:

"Smith & Nephew's explanation is all Greek. The level of disclosure from Smith & Nephew over its Greek debacle is thin to the point of invisibility. The medical products blue chip is refusing to give any detail about the nature of the dodgy sales practices it has uncovered within Plus, its newly acquired business.

Advisers to the company insist that this is not about covering up flaws in a $900 million acquisition that seems to have gone badly wrong. The silence, they say, is merely to placate S&N lawyers, who want the best possible chance of suing the Swiss vendors for compensation if that proves necessary.

The episode reveals the dangers of buying competitors for cash. Due diligence was done in this case ahead of the acquisition in March 2007, but target companies are of course loath to give up their secrets to their closest rivals before a contract is irrevocably signed. So S&N resorted to accepting representations and warranties from the vendors.

Only time will tell whether those warranties are worth the paper they are written on."

Hosking continued,

"There is so much we do not know about this case, it is a wonder the shares slumped only 13 per cent yesterday. The company won't say whether the police have been called in. They won't say what proportion of the acquisition payment is held in escrow and could therefore be clawed back, indeed for most of yesterday they appeared not to know.

Bizarrely, they even refused to name the vendors or even to disclose the name of their own law firm, a large City practice, we are told. The case has all the hallmarks of an overzealous lawyer.

Even if some facts do need to be hushed up for now, there is no excuse for the gobbledegook, ambiguity and obfuscation in the rest of the S&N statement yesterday.

Maddeningly, the company cannot even bring itself to admit in plain English that it has lost customers. No, it has merely ‘experienced reductions in sales relationships.’

There is more confusion and contradiction in the statement. S&N does not expect to recover the lost revenues from the Greek disaster, but insists that this will have no impact on the continuing robust growth of the business. Work that one out if you can.

The sooner shareholders are told in plain English what went wrong and the likely bill for it all, the sooner they may be ready to move on and forgive. When the dust has settled, David Illingworth, chief executive, must be held fully to account."

Ouch.

Pressure on Illingworth

Robert Lea of the Evening Standard wrote on May 1:

"News of the emerging scandal will pile the pressure on Illingworth, the American who replaced S&N's former driving force Sir Chris O'Donnell when he quit last year amid shareholder recriminations.

Illingworth was caught up in a fiasco last autumn when the company had to recall hundreds of badly made knee implants, forking out compensation of up to £50,000 a time as patients had to have them removed.

While the acquisition of Plus was the last deal done by O'Donnell before his departure, Illingworth will have been fully involved in the takeover as his then chief operating officer."

In an article published on May 2 in Investors Chronicle, Richard Hemming wrote that Illingworth's comments, "rather than pacifying the market, have angered shareholders because of the time taken to make the market aware of the problem. Smith & Nephew says it was aware that there were problems upon taking over the company in June of last year."

“We and the rest of the market were shocked by the announcement and were surprised that it has taken nine months for them to formally announce this, notwithstanding the investigation,” said Charles Stanley analyst Jeremy Batstone-Carr in the article.

Hemming continued, "Smith & Nephew claimed to have unearthed 'unethical sales practices,' but there is also doubt over this, says Mr. Batstone-Carr, because the company has called in lawyers and the police. “If Plus activities were deemed to be unethical then it might have been possible to simply alter business practices,” he says.

Hemming noted that JP Morgan analysts said the news had brought the merits of S&N's acquisition-driven strategy into question.

"With roughly a third of the pro forma acquired revenues lost, from an acquisition that substantially increased Smith & Nephew's indebtedness, this revelation highlights to us the inherent risks of pursuing debt funded, acquisition driven growth in the med tech industry, from a relatively weak financial position," JP Morgan analyst Thomas Jones wrote.

Smith & Nephew’s Future

Finally, wrote Hemming, "Smith & Nephew has a long history of attempting to deliver growth through acquisition, sometimes successfully (i.e., Midland Medical Technologies), sometimes less so (Biomet). Smith & Nephew’s current plans still include the potential for further acquisitions. With these revelations, one has to ask whether this implicit acquisition-driven growth should now be afforded a larger discount by investors."

In spite of the criticism of S&N’s acquisition strategies and veiled threats of going after former Plus executives, Illingworth remained committed to the company’s growth strategies. He told analysts on the May 1 call that the issues which came to light during the integration would not affect the medical device maker's strategy to seek out "bolt-on" acquisitions. He also said despite the extra costs arising from the investigation, he still saw future benefits from the Plus deal.

Illingworth said that he would continue in his job and that no senior executives had resigned or been asked to leave.

In a May 9 research note, Citigroup said S&N’s market cap has lost $1.74 billion since the disappointing first quarter results were released on May 1—almost twice the price paid for the Plus Orthopaedics acquisition.

While Citigroup suggested that this was a market overreaction, it is concerned that the second and third quarters may further disappoint, with potential for more bad news from the ongoing investigation into unacceptable sales practices at Plus.

Many industry observers have long wondered how S&N has stayed independent in a marketplace bent on consolidation. The “Sound of Music” misadventure may well become S&N’s Greek tragedy and bring big changes to the venerable British company.