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Smith & Nephew plc


2 Temple Place, Victoria Embankment
London WC2R 3BP
Fax: +44 (0) 171 240 7088

Public Company
Incorporated: 1937 as Smith & Nephew Associated Companies Limited
Employees: 12,223
Sales: £1.02 billion (1995)
Stock Exchanges: London
SICs: 3841 Surgical and Medical Instruments; 3842 Surgical Appliances and Supplies; 3089 Miscellaneous Plastics Products; 2844 Toilet Preparations; 3827 Optical Instruments and Lenses; 2393 Textile Bags; 5047 Medical and Hospital Equipment; 2830 Drugs

Company History:

Smith & Nephew plc is the fifth-largest health care products supplier in a worldwide market worth £5 billion. Its main competitors include Johnson & Johnson, 3M, Bristol Myers-Squibb, and Baxter. The company's return on investment is consistently among the best in Britain.

Victorian Origins

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 Whitefriargate, 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 lent 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 on 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. And 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, incorporating 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 (S&N sold them under the trade name "Lilia," which had originally referred to an industrial cellulose towel product). 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 work force, 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. S&N staff increased to 1,200 as the company obtained contracts with several of the Allied governments as well as the American Red Cross. S&N's textile capacity was also 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 S&N a natural opportunity. Nevertheless, after the Great War, production was scaled down considerably, to 183 employees. And the Great Depression spurred many administrative changes that helped shape S&N 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. Though 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. And 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, S&N 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, though a media campaign to enlist the support of other employers was necessary. S&N'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 S&N leased processing time until the 1970s.

Before its 1951 purchase of, S&N had been previously 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. However, like other research firms S&N were to acquire later, 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 S&N'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, S&N was also able to license these processes to other firms.

S&N entered the hypodermic syringe market in 1954 with the purchase of S. & R.J. Everett & Co. S&N 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, S&N 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, S&N bought Johnson & Johnson's Wrexham sanitary protection factory in 1962. This line contributed the second largest turnover to S&N; health care products remained first. Sanitary protection products made up the second largest portion of S&N's profits after health care 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 were £28.3 million.

In 1968, the giant Unilever conglomerate tried unsuccessfully to purchase S&N in an emotional contest with S&N 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, S&N began licensing OpSite, a skin covering, through Johnson & Johnson. The 1985 purchase of the American company Affiliated Hospital extended S&N's product line into rubber gloves and steel trolleys. 3 Sigma Inc., another U.S. company, was also 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.

S&N's 1989 purchase of Ioptex in 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 S&N'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 S&N'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'Oréal in the 1990s.

Searching for Twenty-First-Century Markets

The transformation of S&N 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, S&N had substantial holdings in Europe and Asia. Sales in the U.K. 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, S&N 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. S&N's division in Japan, established in 1990, achieved sales of more than £30 million in five years. In the 1990s, S&N forecast that China and India would be among the ten largest health care markets within thirty years. By 1995, the company had three offices in China, with plans to eventually manufacture bandages there. 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 S&N 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 in order 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, S&N 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. 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 the S&N's ability to fund the project through years of testing. The product was not expected to be marketed until the end of the century. But after years of consistently respectable earnings and long-term investments in many new areas of technology. The company's future seemed assured.

In 1993, Smith & Nephew finally decided to withdraw from competition with cheaper imported denim and cotton. Nevertheless, after years of consistently respectable earnings and long-term investments in many new areas of technology, its future success in its designated specialty seems assured.

Principal Subsidiaries: Smith & Nephew Pharmaceutical Ltd.; Smith & Nephew United Inc.; Smith & Nephew Richards, Inc. (USA).

Principal Divisions: Health Care; Medical Fabrics; Therapy Equipment; Toiletries.

Principal Operating Units: Smith & Nephew North America; United Kingdom and Europe; Africa; Asia; and Australasia.

Further Reading:

"Advertorial Blitz Pushes S&N's Simple Skincare," Marketing Week, March 31, 1995, p. 15.
Auguston, Karen, "Giving Customers What They Want, When They Want It," Modern Materials Handling, September 1995.
Beresford, Philip, "Winners & Losers: MT250," Management Today, June 1991, pp. 32-42.
Borzo, Greg, "Glove Shortage Creates Anxiety," Health Industry Today, November 1991, pp. 1, 14-15.
Braly, Damon, "Traditional Burn Dressings Market Slowed by Growing Synthetics Usage," Health Industry Today, December 1993.
Ferguson, Anne, "Smith & Nephew's Specialty," Management Today, April 1986, p. 64.
Foreman-Peck, James, Smith & Nephew in the Health Care Industry, Aldershot, Hants: Edward Elgar, 1995.
Heller, Robert, et. al., "Britain's Best Managed Eight," Management Today, April 1986, pp. 58-67.
Hoggan, Karen, "Nivea: Smooth Operator," Marketing, August 30, 1990, pp. 18-19.
Larson, Mark, "Cedaron Signs Licensing Deal with British Firm," The Business Journal Serving Greater Sacramento, February 21, 1994.
Latham, Valerie, "Nivea Spreads Range," Marketing, April 1, 1993, p. 5.
Lorenz, Andrew, "Why Focus Favors Smith & Nephew," Management Today, January 1996, pp. 32-36.
Lucas, Spencer, "Driven to Success: Ken Harvey Relied on Enthusiasm--Not Experience--To Get Ahead at Smith & Nephew Richards," Memphis Business Journal, December 18, 1995, p. 1A.
"Sanitary Protection Products," EIU Retail Business, No. 437. July 1994.
Sewell, Tim, "An Investment Pays Off," Memphis Business Journal, May 15, 1995.
Silverman, Suzann D., "A Joint Effort," International Business, August 1994, pp. 68-70.
"Smith & Nephew in Good Health," Management Today, June 1991, p. 36.
Upton, Richard, "The Bottom Line: Smith & Nephew Sticks to the Well-Tried Remedies," Personnel Management, July 1987, pp. 37-39.

Source: International Directory of Company Histories, Vol. 17. St. James Press, 1997.

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