Bohuon clicks with Smith & Nephew

When Olivier Bohuon took over at the helm of Smith & Nephew after only six months in charge of French drugmaker Pierre Fabre, a few eyebrows were raised among City observers.

Although he had two decades of experience at pharmaceutical companies under his belt, including senior positions at GlaxoSmithKline and Abbott, Mr Bohuon had not worked a day at a medical device company.

But it did not take long for the Frenchman to realise that the drugs industry was a world away from that of high-tech wound-treatment bandages, keyhole surgery tools and bespoke titanium hips and knees.

“About 90 per cent of the products that we develop end up in the market a year or two later, so it’s not venture capital. It’s very different to pharma,” he tells the Financial Times.

“A surgeon tells our engineers: ‘I would like to get a tool that allows me access to this particular joint. Can you build it?’ So we do. “That’s why it’s different to the pharma model. And I didn’t know that when I came to the company. I was naive to believe that it was the same.”

When Mr Bohuon took over in April 2011, S&N was facing market speculation about an impending takeover from Johnson & Johnson of the US.

With the industry seeing its margins being squeezed by ever-tightening healthcare budgets and cash-strapped patients delaying elective surgery, the FTSE 100 company was in need of change.

The response from Mr Bohuon was to move S&N’s focus towards higher margin tools for sports medicine and high-tech wound-care products.

Like the company’s minimally invasive medical tools, Mr Bohuon’s cure was not radical surgery, but did involve some pain.

In November, Mr Bohuon launched a cost-cutting programme to save $150m a year, which included the axing of 770 jobs – about 7 per cent of the group’s 11,000-strong workforce.

The savings were earmarked to bolster the group’s R&D programme, which S&N has committed to increase by an additional $300m over the next five years, bringing development spending up to 5 per cent of group revenues.

“We currently spend 3.9 per cent of our sales on research and development,” Mr Bohuon says. “Pharmas spend, 10, 15 or even 20 per cent [on R&D]. We don’t have the cost but we also don’t have the risk.”

Another move was to sell off S&N’s 51 per cent stake in its non-core biologics business for $98m upfront and a $160m five-year note, allowing the group to cut its net debt to $100m – less than one-tenth of the level just two years ago.

“The new chief executive is now 12 months into his tenure and after detailing a clear and coherent strategy to reposition the business to thrive in a more challenging business environment, S&N has made swift progress in implementing it,” says Tom Jones, analyst at Berenberg Bank.

“After declining for most of the second half of 2011, consensus earnings expectations now seem reasonable, and if anything, the pressure is on the upside, in our view.”

As well as trimming the medical device maker down, Mr Bohuon has been targeting bolt-on acquisitions in emerging markets, which comprise only 10 per cent of revenues.

“The economic environment has forced people to look at the potential of their project, rather than just how sexy it is,” he says. “It has to create value. And it creates value if it is innovative and if you are able to price it well.”

With the introduction of western diets into emerging economies bringing with them a rise in diabetes-related ulcers, S&N’s advanced wound-care unit has found new and lucrative markets to target.

However, medical device makers are also facing the challenge of what Mr Bohuon calls “a switch from the doctor-led model to an admin-led model”.

“In the past, the doctor was the prescriber. But now the admin guy is in charge and asking for big discounts.”

In a year that has been filled with bid rumours, a restructuring and even a $22m fine from US regulators for bribing Greek doctors to use its products, Mr Bohuon has barely had time to relax.

“I have the impression that I only arrived at S&N yesterday. I was naive enough to believe that things would happen quickly. But an organisation moves slowly, although the company has been willing to change,” he says.

“Are we still a target? We could be. But we’re not thinking about that now.”