Smith & Nephew PLC ADRSNN

Morningstar Rating

Stock Research and Analysis

by Julie Stralow, CFA

Smith & Nephew faces tough competitors in its chosen fields, but we think its devices offer compelling value propositions.

The firm operates in three medical device niches--orthopedic implants, arthroscopy tools, and advanced wound management. In orthopedic implants, our favorite business of the three, Smith & Nephew remains in a middle tier of competitors, substantially trailing Zimmer ZMH, Johnson & Johnson JNJ, and Stryker SYK in terms of market share. Read more

Bulls Say

Demographic trends, such as aging and obesity, favor substantial volume growth in Smith & Nephew's biggest segment, orthopedic implants, for the next couple of decades.

Smith & Nephew's focus on younger, more active orthopedic patients could help it extend mix benefits if it can introduce new products that greatly improve patient outcomes.

As an established wound-management tool provider, Smith & Nephew looks well positioned to benefit from increased competition in the negative pressure wound therapy market. Read more

Bears Say

Although the firm did receive a monetary settlement that lessened the blow of lost expected sales from Plus after uncovering poor selling practices, we question management's due diligence and would be concerned about future acquisitions adding value.

Restructuring charges and inflated selling, general, and administrative costs plague Smith & Nephew's past operating results. These operating inefficiencies suggest an undisciplined investment approach, which may not change overnight.

KCI is suing Smith & Nephew for its entry into the negative pressure wound therapy market. Even if KCI is not successful in that pursuit, the battle could cost Smith & Nephew legal fees and management focus. Read more

Strategy

Smith & Nephew aims to build sticky physician relationships by tailoring devices to improve surgical procedures and offering extensive training with its tools. Its primary growth strategy revolves around improving procedure outcomes with each new device iteration and then boosting prices and unit volume. Read more

Management

After a decade of Christopher O'Donnell's reign, Smith & Nephew promoted David Illingworth to CEO in mid-2007 after his stints as COO and the orthopedic business leader. We think the firm remains in capable hands and would classify the stewardship at Smith & Nephew as fair. Read more

Profile

Smith & Nephew is a U.K.-based company with more than 150 years of operations. Orthopedic devices accounted for 57% of 2008 sales; major orthopedic offerings include knee and hip implants and tools to set bone fractures. Read more

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