Heron House, 15 Adam Street
Smith & Nephew aims to be the first choice for patients, customers, investors, and employees, by establishing and meeting clear performance targets, developing innovative new products, and earning the trust of all with whom we deal.
Smith & Nephew plc operates as a medical device provider in more than 35 countries. Its products are related to orthopaedics, endoscopy, advanced wound management, and rehabilitation. The firm also operates BSN Medical, a 50/50 joint venture, along with Beiersdorf AG. Since 1998, Smith & Nephew has been restructuring business operations and divesting its consumer businesses to improve earnings and focus on medical devices. In 2001, the firm was a leader in wound management and was among the top four orthopaedic companies in the industry.
Thomas James Smith was born in 1827. He trained as a pharmacist, first as an apprentice in Grantham, Lincolnshire and then, in 1854 and 1855, at London's University College, where Lord Lister, the antiseptic innovator, also studied. In 1856 he was admitted into the newly formed Royal Pharmaceutical Society and in August he bought his first shop at 71 White-friargate, Hull.
Smith soon became involved in the wholesale trade of bandages and related materials. Smith took advantage of his proximity to the docks and fishermen of Hull and began supplying hospitals with cod liver oil, valued for its therapeutic value in cases of rickets, tuberculosis, and rheumatism (vitamins had not yet been identified). At the time, doctors' visits were expensive and pharmacists were often the first ones consulted. Most medicines did not require a prescription, and factory-made pills were only beginning to displace concoctions produced by doctors and pharmacists.
Smith's father loaned him £500 in 1860 so he could convert two cottages on North Church Street into a warehouse. It was such a good year that he sought even larger accommodations in 1861, renting some buildings at 10 North Churchside, which he bought in 1880 with the help of another £500 loan from his father. Business was so good because he had traveled to Norway on a Norwegian gunboat to buy 750 gallons of cod liver oil. It was a shrewd business deal, as the Norwegian product was both cheaper and better tasting than the previous supply from Newfoundland; the solid fat (stearine) had been processed out of it. At the same time, Smith's marketing efforts generated many new accounts among the hospitals of London. By 1880, he had even shipped once to Cairo. At the encouragement of a correspondent, Smith registered his oil under the brand name Paragon Cod Liver Oil, to punctuate its outstanding qualities. Two larger competitors established factories in Norway after medical opinion swung decidedly in favor of the Norwegian product.
T.J. Smith never married; in 1896, a few months before his death, his 22-year-old nephew Horatio Nelson Smith (named after T.J.'s father) became a partner. H.N. was known for his long hours and direct, inquisitive manner. H.N. had apprenticed for six years making draperies. The firm, now known as T.J. Smith & Nephew, shifted its production away from cod liver oil in favor of bandages. In 1907, it was registered as a limited liability company. When H.N. joined the company in 1896, staff numbered three. But when he signed a contract with the Turkish government in 1911 after the outbreak of the war with Bulgaria, employment reached 54. Soon thereafter a small local competitor, Lambert & Lambert, was acquired.
Smith & Nephew bought sanitary towel manufacturer SASHENA Limited in 1912 (the name an acronym for 'Sanitary Absorbent Safe Hygienic Every Nurse Advocates'). The line was later known as, 'Lilia,' which had originally referred to an industrial cellulose towel product. The line also incorporated the 1925 acquisition of a half share of a German mill for producing cellulose sanitary towels, which had been developed to cope with the scarcity of cotton. As James Foreman-Peck records in his book Smith & Nephew in the Health Care Industry, the materials and methods for their manufacture were similar to surgical dressings, and women, buoyed by suffrage and a heightened role in the workforce, were becoming more affluent. In 1954, the line continued with the introduction of the Lil-lets brand of tampons.
Configuring for Modern Times
World War I provided a huge demand for bandages. Smith & Nephew staff increased to 1,200 as the company obtained contracts with several of the Allied governments as well as the American Red Cross. The firm's textile capacity also was used for producing certain military paraphernalia, such as weapons belts. In addition, legislation in the early 1920s, which stipulated that miners and factory workers have access to first aid kits in the workplace, offered Smith & Nephew a natural opportunity. Nevertheless, after the Great War, production was scaled down considerably, to 183 employees. Furthermore, the Great Depression spurred many administrative changes that helped shape the company into a modern manufacturing corporation. Marketing efforts became more specialized. The company was incorporated as Smith & Nephew Associated Companies Ltd. (SANACO) in 1937.
Smith & Nephew often looked to Germany for technological innovations; H.N. Smith's knowledge of the German language appears to have served him well. In 1930, the company obtained the British rights to Elastoplast bandages, made from a specially woven cloth coated with adhesive, from Lohmann AG. The bandage, though more expensive than others, provided a quick and very effective fix for varicose ulcers in particular, noted various journals.
Smith & Nephew introduced a similar bandage called the Cellona plaster of Paris bandage in 1930. Although it seemed more expensive than the materials it would replace, the effort saved from making messy casts offset the costs and the bandage's light weight made patients more comfortable and healed them faster. Concerns over industrial accidents made the product's introduction timely. The bandages were later named Gypsona.
Much of Gypsona's complex manufacturing process originated with German companies. Several other types of bandages soaked in various types of medicines were co-opted from Germany and the United States. In 1946, a waterproof version was developed, and a new line known as Ultraplast (which later earned a Royal Warrant) came with the 1958 purchase of the Scottish company Wallace Cameron. In 1961, Elastoplast bandages controlled three-quarters of the market.
Cold War Diversification
In the 1950s, Smith & Nephew had to decide whether to modernize its textile operations in Britain or buy textiles from the Far East. It and the unions agreed to the former, although a media campaign to enlist the support of other employers was necessary. The firm's mills subsequently earned a great reputation for efficiency. Interestingly, its mills in England and France were poised to produce denim when the enduring blue jeans fashion trend arrived from America. The automation of the company's mills included the purchase of one of the earliest commercially available computers in the 1950s, called the Leo. Its 1963 replacement was so large that the company leased processing time until the 1970s.
Before its 1951 purchase of Herts Pharmaceuticals, Smith & Nephew had been dependent on technology developed outside the company. Herts, which before World War II was the U.K. subsidiary of Beiersdorf, was best known for PAS and other of the earliest oral treatments for tuberculosis. Like other research firms the company was to acquire later, however, Herts lacked the resources to develop and promote them properly on its own. After the merger, Herts also worked on psychotropic drugs and, closer to Smith & Nephew's core business, breathable membranes for covering wounds, the first of which was called Airstrip and was introduced in 1952. In addition to guaranteeing itself a supply of these types of films, the company was able to license these processes to other firms.
Smith & Nephew entered the hypodermic syringe market in 1954 with the purchase of S. & R.J. Everett & Co. The firm set up a recycling service to provide a more thorough sterilization than the boiling the hospitals had been doing, but disposable syringes made this obsolete.
Through Lilia Limited, the company formed a joint selling company with Arthur Berton Ltd., makers of the Dr. White's Brand, in 1955. Three years later both Arthur Berton and Southalls (Birmingham) Ltd. were acquired, making Lilia-White (Sales) Ltd. the leader of the sanitary protection market. To bolster its position, Smith & Nephew bought Johnson & Johnson's Wrexham sanitary protection factory in 1962. This line contributed the second largest turnover to Smith & Nephew; healthcare products remained first. Sanitary protection products made up the second largest portion of the firm's profits after healthcare products. The company also sold cosmetics and children's clothing.
The group bought No. 2 Temple Place in 1962 to house its headquarters. New products of the 1960s included disposable products and washable cotton blankets to prevent the spread of infection in hospitals. It introduced a standardized nurse's uniform, which was more efficient to produce than the myriad styles then existing among hospitals. A huge leap in efficiency was realized by a joint venture with Johnson & Johnson and a regional Scottish hospital board to develop individually wrapped sterilized dressings, which saved the hospitals the considerable expense of installing and running sterilizing equipment. Total group sales in 1964 was £28.3 million.
In 1968, the giant Unilever conglomerate tried unsuccessfully to purchase Smith & Nephew in an emotional contest with its management, who initiated a campaign for the hearts and minds of its shareholders, touting the company's family tradition as well as its superior financial performance. The tactic worked well when Unilever's plan to slash dividends came to light.
The 1970s were characterized by pressures on margins and volume. The National Health Service, which accounted for much of the firm's U.K. business, became more demanding and cost-conscious; international competitive pressure also increased. This resulted in increased resources for research and development in the next decade. New buildings at the company's venerable Hull site were constructed in 1981 and 1986. Marketing and sales operations for the Health Care division were brought to Hull in 1982, joining the rest of the company's functions.
In the mid-1980s, Smith & Nephew began licensing OpSite, a skin covering, through Johnson & Johnson. The 1985 purchase of the American company Affiliated Hospital extended the firm's product line into rubber gloves and steel trolleys. 3 Sigma Inc., another U.S. company, also was purchased. In 1987, sports injury specialist Donjoy Inc. and Sigma Inc., which made peristaltic infusion pumps, were added. Phizer Hospital Products Inc.'s United Medical Division, which made special surgical dressings in Florida, was acquired in 1988. In 1986, the company bought Richards of Memphis, Tennessee, which specialized in trauma and orthopedics, for £192.7 million.
Smith & Nephew's 1989 purchase of Ioptex Inc. for $230 million suffered from bad timing: soon thereafter, prices for the company's cataract replacement lenses fell by nearly two-thirds, thanks to U.S. government intervention. Smith & Nephew sold the company to Allergan for £11 million in 1994, pulverizing the company's profit that year.
But an example of the company's good fortune was illustrated by Nivea brand moisturizing cream. Overseas rights for the Nivea brand of moisturizing cream passed to Smith & Nephew with the acquisition of Herts Pharmaceuticals Ltd. in 1951. Soon it contributed almost as much as Elastoplast bandages to the firm's consumer sales. In 1992, Beiersdorf paid £46.5 million to buy back U.K. and Commonwealth rights for what was estimated to be the largest toiletry brand in the world. Smith & Nephew continued to earn a 17 percent royalty on U.K. Nivea sales without having to spend any money on advertising. In the 1960s, the brand was extended with 'Nivea Lotions' and an upscale skin care line known as 'Nivea Visage' competed with L'Oreal in the 1990s.
Searching for 21st-Century Markets
The transformation of Smith & Nephew into a modern multinational corporation occurred under Chief Executive Eric Kinder in the 1980s. S & N's international trade dated back to T.J. Smith's early days; companies had been established in Canada in 1921 and in Australia and New Zealand in the early 1950s. Kinder felt the company needed to extend its export markets beyond post-Imperial Commonwealth countries. By the late 1990s, Smith & Nephew had substantial holdings in Europe and Asia. Sales in the United Kingdom accounted for 54.1 percent of the group's total in 1980; ten years later, that figure had dropped to 23.6 percent, with the United States as the company's biggest market.
The company broadened its European reach. In 1987, it bought the Spanish firm Alberto Fernandez S.A., which made latex products such as gloves and prophylactics. In France, the company bought Cogemo S.A., makers of continuous passive motion machines, and Sanortho S.A., which made orthopedic implants. A German distribution venture with B. Braun GmbH was set up in 1985 and expanded to include Switzerland in 1988. But newly developing countries in Asia seemed to offer the best opportunities for growth. Smith & Nephew's division in Japan, established in 1990, achieved sales of more than £30 million in five years. In the 1990s, the company forecast that China and India would be among the ten largest healthcare markets within 30 years. By 1995, the firm had three offices in China, with plans to manufacture bandages there eventually. Sales in Africa, Asia, Australia, and the Pacific were worth £151 million in 1994, still quite less than the £239 million garnered in the United Kingdom. The United States remained the largest market, providing Smith & Nephew with 40 percent of its sales, or £470 million. Continental Europe accounted for £205 million in sales, up from £37 million in 1984.
At the same time as the geographic range was expanded, the commodity status of certain product lines had to be redressed to improve the company's profit margins. In 1991, John Robinson took over as chief executive, succeeding Kinder, who then served as chairman. Under Robinson, the company specialized in products for tissue repair and protection ('wound management'), rather than the grab bag of medical supplies it once offered. Its research goals have been progressing, an executive told Management Today, 'from replacement to repair to regeneration.' In 1993, Smith & Nephew moved its research center from an Essex mansion to a new site in York Science Park, convenient to York University, an esteemed research institution.
Sacramento-based Cedaron Medical Inc. licensed its Dexter computerized physical therapy system in 1994 to Smith & Nephew, which hoped to succeed by offering a high-tech solution at a lower than average price. The rehabilitation equipment market was growing at least five percent a year at the time of the acquisition, and industrial hand injuries such as carpal tunnel syndrome, which was then beginning to get its share of press attention, seemed a precipitous omen for the Dexter.
Smith and Nephew committed at least $10 million to a 1994 joint venture with California's Advanced Tissue Sciences Inc. (ATS) to culture cartilage cells for joint replacement applications. This project held the potential to open a vast new market and save patients from expensive and painful surgery. ATS benefited from Smith & Nephew's ability to fund the project through years of testing.
The firm continued its growth into the mid-1990s. In 1995, the firm made a series of key acquisitions, including Homecraft Holdings Ltd., a U.K.-based manufacturer of daily living aids; Acufex, a leading manufacturer of surgical instruments and related devices; and Professional Care Products Inc., an orthopaedic accessories firm. The following year, Smith & Nephew continued on its buying spree as well as focusing on product development. That year, the firm announced another joint venture with ATS that would produce bio-engineered human skin replacement called Dermagraft. The new product was targeted at the $2.5 billion chronic diabetic foot ulcer market and eventually became available in 1997 to the U.K. market.
Smith & Nephew also teamed up with the University of Massachusetts in 1996 to establish a research center that was dedicated to the development of endoscopic procedures and instrumentation. The Human Tissue Repair Research Laboratory also was opened in the biology department of the University of York and was fully funded by the firm.
Restructuring During the Late 1990s and into the New Millennium
In 1997, the company began to restructure operations. A Health Care division was formed, integrating the operations of orthopaedic and endoscopy businesses. The new division, based in Memphis, Tennessee, was ultimately formed as a means of consolidating all U.S. sales and distribution functions. The restructuring continued into the following year when Smith & Nephew adopted a new management structure as well as a new strategy that focused on core operations in orthopaedics, endoscopy, and wound management.
Exogen Inc, a U.S.-based manufacturer of ultrasound fracture healing devices, and 3M Corp.'s shoulder and hip implant and instrumentation segment, were acquired in 1999, as part of the firm's new focus. The company continued to look for strategic partnerships that fit into its new plan and began divesting operations that were no longer suitable, including its Bracing & Support business.
In November 1999, Smith & Nephew's stock began trading on the New York Stock Exchange. At the time of the listing, nearly one-third of company employees were based in the United States and more than 40 percent of company sales originated in the United States. In a November 1999 Memphis Business Journal article, Larry Papasan, president of the firm's Memphis operations, stated the listing 'will boost the company's visibility and help its quest for more acquisitions. Our objective is to significantly expand employee ownership, to hopefully attract more customers and general owners of our shares, and make our shares much more visible to the investment community and institutional investors.'
The firm continued with its restructuring strategy into the new millennium. In June 2000, its consumer products business, including its feminine hygiene and toiletry products, first aid dressings, and the Nivea distribution business, was sold. In November, Orthopaedic Biosystems Ltd. Inc., a U.S.-based surgical device firm, was purchased as part of its focus on endoscopy. Operating profit for fiscal 2000 increased by 24 percent.
In 2001, Smith & Nephew sold its Ear, Nose, and Throat (ENT) business to Gyrus Group plc. In April of the same year, a joint venture with Beiersdorf AG, entitled BSN Medical, began operation. The venture included the woundcare, casting, bandaging, and phlebology businesses of both firms, and each parent owned 50 percent of BSN. Smith & Nephew CEO Chris O'Donnell stated in a company press release, 'We believe that the creation of the joint venture is the best way to maximize the value of these businesses for the parent companies and their shareholders. The parents have appointed a first class management team as BSN Medical, and are confident that they will achieve a successful future for the new company.'
Smith & Nephew management remained confident that the firm was on the track to achieving future growth and profits. The company continued to focus on research and development as well as broadening its core products and services by forming strategic alliances and making key acquisitions.
Principal Subsidiaries: Exogen Inc.; Orthopaedic Biosystems Ltd. Inc.
Principal Divisions: Orthopaedics; Endoscopy; Wound Management; Rehabilitation; BSN Medical.
Principal Competitors: Biomet Inc.; Stryker Corporation; DePuy Inc.