Smith & Nephew’s Bold Spin Off

What makes SNN (and their new partner, Essex Woodland) think this will succeed?

Smith & Nephew plc’s deal with Essex Woodlands to spin off its clinical therapies business (DUROLANE – Hyaluronic Acid, Stabilized Single Injection, EXOGEN Ultrasound Bone Healing System, ScoliScore and SUPARTZ Joint Fluid Therapy) into a new company called Bioventus LLC raises the specter of a well capitalized and newly re-constituted biologic/injectables challenge to the metal and plastic implant business.

Considering that 61% of Smith & Nephew’s business comes from products like the Anthony Hip and the Genesis, Journey or Legion knee systems—which could theoretically compete with Bioventus’s biologic injectables—this is a bold and interesting move.

Orthopedic Biologics

Mark Augusti
CEOThe spun-off company, 49% owned by Smith & Nephew and 51% owned by $2.5 billion private equity firm Essex Woodlands and management, has one of the largest Ambulatory Surgery Center (ASC) and outpatient distribution platforms in the United States. CEO Mark Augusti is setting his new company’s sights on various biologic and other injectable technologies which will, if not modify the underlying osteoarthritis disease, at least delay major surgery.

“People are looking for biologics solutions and a company that can be the largest and most trusted brand for orthopedic biologics, ” commented Augusti to OTW. “Fundamentally, what we bring is a comprehensive regulatory, reimbursement and health economics approach to biologics products for orthopedic healthcare.”

Bioventus starts life with $250 million in annual sales, a global distribution footprint and a 500 employee payroll—of which 300 are direct sales people serving the ASC and outpatient orthopedic markets in the United States. That makes Bioventus among the top five biologics companies supplying orthopedic surgeons—along with Musculoskeletal Transplant Foundation (MTF), AlloSource, LifeNet  Health and RTI Biologics, Inc..

Product Lines

Bioventus is, essentially, Smith & Nephew’s clinical therapies division and its new CEO was that division’s president. Now spun off, the former clinical therapies team is hoping to create a more nimble, risk taking, action oriented culture which, with access to Essex Woodlands deep pockets, could create a leading biologics and regenerative medicine business in orthopedics. Bioventus’s inherited product lines, which increased sales by about 7% last year, are:

DUROLANE – Hyaluronic Acid, Stabilized Single Injection: A hyaluronic acid (HA) containing product used for the symptomatic treatment of mild to moderate knee and hip osteoarthritis. DUROLANE differs from SUPARTZ and other multi-injection hyaluronic acid products in that one single injection represents a full course of treatment.

EXOGEN Ultrasound Bone Healing System: The EXOGEN Ultrasound Bone Healing System is the only bone healing device approved to accelerate fracture healing of certain (see indications) fresh fractures, speeding the process in those indicated cases by 38%. EXOGEN has also been demonstrated to heal 86% of particular non-union fractures in clinical study.

EXOGEN Ultrasound Bone Healing System / Bioventus LLC

SCOLISCORE: A prognostic test (and winner of OTW Spine Technology Award) that is the first and only genetic test proven to give physicians and parents insight into the progression of a child’s Adolescent Idiopathic Scoliosis (AIS). Until SCOLISCORE, a diagnosis of AIS was frightening and uncertain for patients and their parents. But this test gives families answers for the future and allows physicians to make informed recommendations for treatment. The test is administered by a physician and requires a saliva sample from the patient, which is sent to a lab for analysis.

SUPARTZ Joint Fluid Therapy:  SUPARTZ is a solution made of highly purified, sodium hyaluronate (hyaluronan). SUPARTZ is used for the treatment of pain in osteoarthritis of the knee in patients who have failed to get adequate relief from simple painkillers or from exercise and physical therapy. SUPARTZ was the first hyaluronan joint fluid therapy commercially available for human use in treating osteoarthritis. More than 143 million SUPARTZ injections have been sold worldwide since its introduction in 1987.

SUPARTZ Joint Fluid Therapy / Bioventus LLC

Recent Performance

Interestingly, as the spin-off date got closer, SNN’s clinical therapies division seemed to increase sales  growth rates with each passing quarter.

To wit:

For the March quarter just ended, the future Bioventus reported sales of $58 million and a nifty profit of $10 million.

For the full year last year SNN’s clinical therapies business posted up sales of $237 million and trading profit of $48 million, with net operating assets of $99 million. The U.S. business had sales of $199 million and trading profit of $48 million, with net operating assets of $95 million

Strategic Direction

According to CEO Mark Augusti, Bioventus’s growth strategy rests on three pillars:

1. “We plan grow our current business by investing in our current technologies and in the process expand indications and labeling.”

2. “We plan to invest in our U.S. distribution and build outside the U.S. Of our 500 employees, 300 are direct sales to outpatient orthopedic healthcare providers in the U.S. With good clinical support, we plan to build a similarly successful distribution system outside the U.S.

3. “Licensing promising technologies as well as acquiring technologies or companies which complement the distribution pipeline we’ve built in the U.S. and OUS. The kinds of technological innovation we are looking for include active biologic technologies, orthopedic injectables, allogeneic, biomaterial, cellular…really any promising biologic technology that lends itself to a strong regulatory, reimbursement and health economics platform in orthopedics.”

The Injectable Market Opportunities

Conservatively, there are more than 30 million steroid, HA and other orthopedic injections performed annually in the U.S. to treat everything from osteoarthritis of the knee to facet pain in the spine to elbow and shoulder pain. Given the changing nature of healthcare economics, the injection market seems ripe for technological innovation. Flexion Therapeutics, Inc., the Boston-based innovator of time release steroid injections and other new injections to treat arthritic pain and the rise of cell based anti-inflammatory injections are giving “needle jockeys” new ways to treat chronic disease like joint arthritis or even soft tissue pain.

But the injection market is not like the orthopedic implant market. As one experienced sales person described it to OTW, the call is not at all like a metal implant call. Not only is the buyer typically an outpatient service provider, but the purchaser is often an “office”—not an individual surgeon. Purchasing and reimbursement issues are also quite different from the more traditional implant call. Is the injectable on a drug plan or is it a straight up procedure reimbursement? Is this a pharma or a biologic? The best sales people in the injectable markets are those that treat the sales call and an entire office call—paying attention and attending to every member of the office from the receptionist who takes the incoming calls to the nurses.

This market also requires sales people who are fully expert on not only their injectable product but also the patient’s condition and all of the alternative treatments.

In other words, it is a market designed for a dedicated effort like the one envisioned by Bioventus.

Essex Woodlands

Bioventus’s new majority owner is Essex Woodlands and, according to CEO Augusti, one of the most important strategic advantages of the new company.

With $2.5 billion under management, Essex Woodlands is one of the largest and oldest growth equity and venture capital firms pursuing investments in pharmaceuticals, biotechnology, medical devices, health care services, and health information technology. Since its founding in 1985, Essex Woodlands has founded, invested, and/or managed over 120 health care companies ranging across all sectors, stages and geography. The team is comprised of 25 senior investment professionals with offices in Palo Alto, Houston, New York and London.

SNN’s Strategy

Perhaps strategic obsolescence is a more accurate description of SNN’s objective with this Bioventus spin off. Clearly the goals are ambitious if not also really interesting.