What happened?
Smith & Nephew (NYSE: SNN) will be acquiring Osiris Therapeutics (NASDAQ: OSIR) for $660M. The investment, announced today, potentially repositions Smith & Nephew within the CTP (cellular and tissue-based products) space. If the deal goes through, it will be Smith & Nephew’s most significant M&A deal within that space since the acquisition of Healthpoint (Santyl, Regranex, and Oasis were the key products) for $782M in 2012.
Speaking of Santyl, Israel-based MediWound–a firm that is also developing topical debridement products to compete with Santyl–has also announced news today: CEO Gal Cohen will be stepping down, after 12 years with the company. He will be replaced by CFO and COO Sharon Malka. Many are watching closely as MediWound–and some other players/products in the space–prepare to launch products which would compete with Santyl. Santyl has largely been considered a cash cow in the wound care space.
But back to the Osiris M&A news: The CTP (also casually referred to as “graft” or “skin substitute”) space has been growing very fast over the past decade, virtually entirely driven in the US. The emergence of different technologies to extend the shelf life of such products has simplified logistics during this period as well. One of the major breakthroughs has been Osiris’ own development and implementation of Prestige Lyotechnology to keep living cells viable without the need (and cost/logistical hurdles) involved with cryo-preservation.
What are some of the underappreciated points to consider?
Most of the focus about the M&A announcement has been on:
- Existing sales/sales growth
- Strong R&D
- Clinical trial assets and know-how
- Potential synergies with S&N’s other divisions
The above points are fair game and relevant for sure. Especially for non-wound care/regenerative experts, they look great on a whiteboard or slide deck. But digging a bit deeper, we can take a slightly more nuanced look at the potential pros and cons for S&N:
Underappreciated points encouraging the acquisition
- For the types of products they focus on, the Osiris sales and marketing apparatus is among the best in the wound care and regenerative medicine industry. The ability to drive case-based (as opposed to tender-based) sales in both the surgical/acute and post-acute settings with complex, high-margin products, is not one to take for granted in this sector. With the proper integration, structuring, and execution, sales executives with those specialties could in theory accelerate sales of other advanced S&N products, including single-use NPWT (PICO) and some of the former Healthpoint portfolio as well. Much of S&N’s PICO commercial team in recent years has been made up of former Healthpoint executives. Side anecdote: perhaps the best wound care sales representative that called on me when I directed US-based wound care centers was a Healthpoint rep who joined Smith & Nephew as part of the 2012 acquisition. He stayed with Smith & Nephew for some time, and grew his territory’s business significantly. He eventually left S&N due to a perceived lack of advancement opportunities in line with his performance.
- S&N had among the most full-service and diverse advanced wound care portfolios pre-acquisition. Even compared to some of the other “Top 6” wound care companies, they have been able to offer deeper discounts in exchange for higher utilization of their portfolio. In some cases, they have offered orthopedic and wound care products together “at risk,” guaranteeing replacement products for surgeries at no charge, should the wound fail to heal. In the mid to long term, today’s acquisition may be used to further strengthen that offering.
- Despite being a multi-billion dollar segment and one of the fastest growing in healthcare, there are not many firms with significant revenues and commercial footprint, yet who are small enough for a major player to acquire. In other words, there are several large, and many, many small players, but not many mid-sized ones to feed an acquisition. Often, the ones who might be otherwise attractive targets find themselves caught up in legal, regulatory, reputational, or other crises. At the time of this announcement, Osiris does not seem to have any such issues.
Underappreciated points challenging the acquisition
- As mentioned above, the Osiris commercialization team has an excellent reputation in the industry. S&N sees the Osiris workforce, of about 360 people, as relatively easy to integrate. Again, this may be a case of everything lining up nicely on the presentation and spreadsheet, but it could be more difficult in practice. Over the past couple of years, Smith & Nephew has lost many of their most talented executives, who often cite a slow-moving, bureaucratic, and risk-averse corporate culture as the reasoning. This corporate culture many not mesh well with the drive that is ingrained in so many Osiris account executives and managers. On the other hand, Smith & Nephew has gone through a senior leadership change in recent months as well. If the acquisition goes through as announced, it will be interesting to see how many of the top-performing Osiris sales and marketing executives are still around in the next few years.
- Perhaps the biggest unknown in the wound care regenerative medicine space is the issue of reimbursement. Recently, there have been some small but potentially foretelling reimbursement developments pertaining to CTPs in the US. Government and payer policy can be extremely tricky to predict, but this is a segment which is heavily influenced by it. Companies like Osiris Therapeutics, Organogenesis Inc. (NASDAQ: ORGO), Integra LifeSciences (NASDAQ: IART), and Acelity [update: 3M (NYSE: MMM) announced it would acquire Acelity less than two months after news of this S&N-Osiris acquisition broke] have historically led the sector with investment in R&D and post-market surveillance trials. However, regulators and payers alike are increasingly asking the question, “Is it enough?” Among industry, this is a tough one: On the one hand, most wound care patients have so many comorbidities that traditional pre and post-market clinical trials in this space are designed such that they exclude vast amounts of patients because traditional investigators otherwise do not know how to control for those variables. The result is that the enrolled patients–both in terms of wound sizes and overall health–do not resemble actual patients eventually treated in “real-life” clinical settings. Why is this important? Because as regulators and payers increase scrutiny of certain types of wound care modalities, we find that even the best-in-class organizations do not have the caliber of Real World Evidence (RWE) data registries and engines to counter a sustained scrutiny of cost effectiveness. Moreover, the players in this space traditionally have been hesitant to band together to combine resources and/or collectively lobby (in part due to the notion that a small number of firms are producing the majority of the limited data). Should ACOs, private payers, and especially CMS turn their attention to certain advanced wound care modalities before such firms have enacted the systems to counter it, then not just companies–but perhaps entire segments of advanced wound care–could in theory vanish faster than they appeared in the first place.
Final thoughts
Like any acquisition of this scale, this one will take months to close, and months or years to integrate the two firms. It is for sure a significant development in the wound care and regenerative medicine space. On its surface, for a large firm like Smith & Nephew, this is an acquisition that much like their successful purchase of Healthpoint some years ago, could potentially infuse both refreshing products and a capable commercial team into their existing business structure. However, as part of their due diligence and stress testing, strategists and investors alike should be careful to not underestimate some under-the-surface considerations, urging both optimism and pessimism alike. In this article, we treated this development as a case study opportunity to explore a few such aspects. Additional points for consideration are available in our free download of The Definitive Wound Care Investment and Partnership Due Diligence Checklist.
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