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SNN to Buy Wound Care Business

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In an attempt to expand its global advanced wound care division, Smith & Nephew (SNN - Free Report) , an international medical device major operating in the orthopedic reconstruction and trauma, endoscopy and advanced wound management market, recently entered into an agreement to acquire, Healthpoint Biotherapeutics for $782 million in cash. The transaction, which is subject to certain regulatory approvals, is expected to complete in December this year.

Texas-based Healthpoint has been working successfully in acute, chronic, and burn-related wound care management for the past few years, and is currently a big name among the biopharmaceutical companies. The company’s Collagenase Santyl ointment is animportant contributortogrowth in the commercial platform. Besides, the company developed an advanced cell therapy, HP802-247, that completed a successful phase 2b study in 2011. In September 2012, the North American phase 3 trial for the same was initiated.

Smith & Nephew considers this acquisition as an important step toward creating a strong position in bioactives, the fastest growing area of advanced wound management. According to the company, this is possible by bringing material revenues from a fast growing product range, an attractive pipeline and the commercial and R&D capabilities of Healthpoint, thereby providing Smith & Nephew with new growth oppurtunities for the next decade and beyond.

The Advanced Wound Management segment supplies a range of products and clinical support services for the treatment of chronic and acute skin wounds. Earlier, with the acquisition of BlueSky, Smith & Nephew gained access to a series of products that treat chronic wounds, such as diabetic ulcers, post-operative, and hard-to-heal wounds using Negative Pressure Wound Therapy (NPWT) and a range of negative pressure pumps and wound dressing kits.

At the end of the third quarter of fiscal 2012, the company’s Advanced Wound Management (AWM) revenue stood at $254 million (contributing 27% to its total revenues), up 4% year over year. Amid the tough economic conditions in the U.S. and Europe, this 4% increase in revenue was encouraging. Industry-wide growth in the U.S. and Europe was 2%.

Besides, we expect this acquisition to perfectly fit with its new strategic framework with five priorities to drive growth in the forthcoming period. This framework includes focus on established markets, growth in emerging markets, innovation, simplification of operating model and supplementing organic growth through acquisitions. Despite several headwinds, Smith & Nephew aims to improve its performance going forward on the back of a strong product pipeline and higher acquisition related investments. The company expects to achieve above market growth in Advanced Wound Management in the upcoming quarters.

Notably, Smith & Nephew retains a strong cash position for the past several quarters. The company exited the third quarter with cash and cash equivalents of $417 million, considerably higher than $265 million in the year-ago quarter. Trading cash flow (defined as cash generated from operations less capital expenditure but before acquisition related costs and restructuring and rationalization costs) was $264 million in the quarter, reflecting a trading profit to cash conversion ratio of 128% compared with year-ago ratio of 102%.

However, the competitive scenario remains intense with Smith & Nephew facing stiff competition from larger players like Stryker (SYK - Free Report) , Johnson & Johnson’s (JNJ - Free Report) DePuy and Zimmer . We have a ‘Neutral’ recommendation on Smith & Nephew. The stock retains a Zacks #3 Rank (Hold) in the short term.

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