Major shareholders are pressing Smith & Nephew, a leading FTSE 100 medical device company, to consider breaking up the business. Following disappointing financial results, investors are calling for the potential spin-off of its orthopaedics division. The primary concerns focus on underperformance in key markets, stagnant growth in the orthopaedics segment, and the need for a more focused strategy.
Key Points Driving Investor Pressure
- Underperformance in the Orthopaedics Division
Smith & Nephew’s orthopaedics division, which manufactures replacement hips and knees, is its largest business line but has faced stagnant growth and diminishing market share, particularly in the US. Once a leader, the company has now fallen to fourth place among major providers in the American market.
- Financial Struggles and Market Share Decline
The company’s shares have dropped over 13% since October, following a reduced growth forecast and challenges in China’s changing procurement policies. However, shareholders point to broader issues, including market share losses in the US, where the majority of the company’s sales are generated.
- Call for Strategic Alternatives
With frustration mounting, some shareholders suggest that a private equity firm might be better suited to manage and revive the orthopaedics division. Two investors expressed disappointment with the current board's reluctance to explore alternatives like a potential sale or spin-off.
Orthopaedics: A "Problem Child" for Smith & Nephew
The orthopaedics unit, while the largest, has consistently lagged behind other business areas like wound management and sports medicine. Investor discontent is fuelled by high executive turnover and lagging innovation, which has caused the orthopaedics line to lose ground to rivals such as Stryker and Johnson & Johnson.
Chief Executive Deepak Nath has introduced a 12-point plan aimed at revitalising the division by 2025, focusing on supply chain improvements and new product launches. However, some shareholders argue that the pace of change is too slow, and the company may need to explore divestment if performance doesn’t improve.
Diverging Investor Opinions on Potential Break-Up
While some investors see a break-up as the best path forward, not all are convinced. A fund manager noted that the orthopaedics division’s reliance on cash flow from Smith & Nephew’s sports medicine and wound care segments makes a spin-off complex. However, activist investors, such as Swedish firm Cevian, which holds a 5% stake, believe a focused strategy could unlock the company's full potential.
Source: (FT.com)
