Acquisition of ArthroCare Corp. 3 February 2014
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Olivier Bohuon Chief Executive Officer 2
Highlights ArthroCare is an innovative medical devices company whose sports medicine business is highly complementary to Smith & Nephew Definitive agreement to acquire for $48.25 per share paid in cash, or approximately $1.7 billion (enterprise value of $1.5 billion) Major investment in our sports medicine franchises, an area of higher growth Compelling strategic rationale Substantial synergies Meets our financial returns criteria Expected to close by mid-2014, subject to usual regulatory approvals 3
Compelling strategic rationale A comprehensive resection & repair portfolio with exciting prospects combination of radio frequency & mechanical resection creates fuller offering ArthroCare s shoulder repair innovation strongly complements our knee expertise Opportunities to drive greater revenue cross-sell combined portfolio reach new customers & markets through Smith & Nephew s global presence Ear, Nose & Throat business is a natural adjacency Strong product pipeline and R&D 4
Strong financial rationale Significant cost & revenue synergies will add $85 million to annual trading profit by 2017 Meets Smith & Nephew s investment criteria ROCE to exceed the Group s WACC in 2017 EPSA accretive from 2015 5
Mike Frazzette President, Advanced Surgical Devices 6
Overview of ArthroCare Leading developer, manufacturer and marketer of Coblation technology used in a variety of minimally-invasive surgical procedures ArthroCare s products are the standard of care for shoulder procedures (sports medicine) and ENT Focused and dedicated sales and distribution network 1,800 employees Global headquarters in Austin, Texas, with operations and offices in strategic locations around the world 7
Coblation technology overview Alternative to standard surgical techniques for removing and treating tissue Standard RF Surgical Products Plasma-generation process to cut or remove tissue Ablates tissue structures to remove diseased tissue Coblation Precise, low temperature tissue removal Gently dissolves tissue structures, preserving healthy surrounding tissues Plasma layer forms at the tip of a disposable wand within milliseconds and enables precise tissue removal Proven benefits of Coblation have led to its adoption across a variety of surgical specialties 8
Sports Medicine Joint Repair Resection A premier sports medicine business ArthroCare Coblation Technology Ambient Family of RF Wands Topaz RF Wands for extremities Atlantech handheld Instruments Smith & Nephew DYONICS Shaver Blades and Burrs for knee, shoulder, hip and extremities ELECTROBLADE dual function device for cutting and coagulating ACUFEX handheld instruments Full spectrum of knotless anchors including the OPUS AutoCuff System PEEK and Titanium anchors for hip and shoulder labral repair Smaller diameter anchors Comprehensive Knee Repair portfolio ENDOBUTTON, FASTFIX 360 OSTEORAPTOR for shoulder Instability TWINFIX Suture Anchors for cuff repair 9
Reaching new customers & markets Increases our scale in the fast growing sports medicine segment Continued investment in innovative products to drive growth US cross-sell the combined portfolio immediate improvements in case coverage International opportunities to drive additional revenues from combined Established Market footprint and channel presence ArthroCare currently has minimal penetration in Japan leverage Smith & Nephew infrastructure to focus on China and other Emerging Markets 10
ENT Addition of naturally adjacent Ear, Nose & Throat (ENT) business, providing new growth opportunities Fully direct in the US Smaller penetration in international markets in many markets, the sports medicine rep would also call on the ENT specialist ENTrigue acquisition provides immediate access to faster growing sinus segment 11
A compelling prospect Highly complementary Great for customers Fast integration 12
Julie Brown Chief Financial Officer 13
Four key topics 1. ArthroCare s recent financial performance 2. Financials of the transaction 3. Synergies and integration costs 4. Financing arrangements 14
ArthroCare s financials 2011 2012 $m $m Revenue 355 368 Growth (YOY) 0% 4% Gross profit 252 261 SG&A (149) (155) R&D (29) (32) Adjusted operating profit 1 74 74 1. Operating profit adjusted for investigation, restatement related and exit costs 15
Transaction financials Purchase price $48.25 per share or $1.7 billion, in cash premium of 20% to ArthroCare s 90-day volume weighted average price per share 15.7x EV/adjusted 2012 EBITDA Financing two year $1.4 billion term loan facility, and Group s existing cash resources and bank facilities Returns return on capital employed will exceed cost of capital in the third full year of ownership EPSA impact broadly neutral in 2014, accretive thereafter 16
Synergies Revenue & cost synergies to add $85 million to trading profit in 2017 Net revenue synergies of more than $50 million in 2017 Significant cost synergies procurement/supply chain commercial overlap of back-office duplication Tax benefits from manufacturing 17
Additional guidance Revenue elimination of manufacturing & licensing payments from Smith & Nephew (2012: $24 million) Cost and net revenue synergies drive EPSA growth 2015 onwards Tax continue to benefit from low tax rates where manufacturing is located further benefit from financing the acquisition Integration and transaction costs estimated $60 million integration costs over the first three full years; front end loaded approx. $40 million transaction costs, incurred in 2014 18
Financial implications Priorities under our Capital Allocation Framework: invest in organic growth deliver a progressive dividend make strategic acquisitions and return excess cash to shareholders Underpinned by leverage commensurate with solid investment grade Share repurchase programme $226m completed to 31 December 2013 share buy-back programme suspended kept under review in line with the framework Leverage Group expects to exit 2014 with net debt/ebitda ratio below 1.5x 19
Olivier Bohuon Chief Executive Officer 20
Summary Smith & Nephew has a strong track record in sports medicine ArthroCare significantly enhances our product portfolio Many exciting opportunity for additional growth Platform to create further shareholder value 21
Questions 22