Smith & Nephew Buys Healthpoint Biotherapeutics

Smith & Nephew plc has acquired substantially all the assets of Healthpoint Biotherapeutics for $782 million in cash. Healthpoint is a developer of dermal repair and regeneration wound care treatments.

PRESS RELEASE
Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, today announces that it is strengthening its global position in advanced wound care by entering into an agreement through its subsidiaries to acquire substantially all the assets of Healthpoint Biotherapeutics (“Healthpoint”), a leader in bioactive debridement, dermal repair and regeneration wound care treatments, for $782 million in cash.

Commenting, Olivier Bohuon, Chief Executive Officer of Smith & Nephew, said:
“The acquisition of Healthpoint is an important step for Smith & Nephew. Strategically, it reinforces our Advanced Wound Management division by giving us a strong position in the fast growing area of bioactive wound care treatment. It brings material revenues from a fast growing product range, an attractive pipeline, and commercial and R&D capabilities upon which we will build. The combination benefits our customers, offering them a truly unique wound care business – having leadership positions across exudate and infection management, negative pressure and bioactives.”

The acquisition has compelling strategic and financial rationale for Smith & Nephew:

Creates a strong position in bioactives, the fastest growing area of advanced wound management
Brings a complementary range of bioactive debridement, dermal repair and regeneration products generating around $190 million 2012 revenues growing at a double digit percentage rate, driven by SANTYL ointment
Adds an established R&D capability in next-generation bioactive therapies including an exciting product pipeline with lead product (HP802-247) entering Phase 3 trials
Integration into our Advanced Wound Management (“AWM”) division
‐ doubles AWM’s US sales, strengthening commercial scale and capabilities
‐ strong cultural fit of innovation and customer focus
‐ opportunity for synergies over time
Expected to exceed Smith & Nephew’s cost of capital in the third full year following acquisition; broadly EPSA neutral in 2013 and accretive thereafter

Paul Dorman, Founder, Chairman and co-owner of Healthpoint commenting on the transaction said:

“Healthpoint and Smith & Nephew have much in common – our commitment to innovation, the desire to serve healthcare professionals and a fundamental dedication to improving the quality of life for patients. We are very proud of our employees and the business we have built and believe now is the right time to allow it to grow to the next level by joining a global organisation like Smith & Nephew.”
Strategic rationale

One of Smith & Nephew’s five strategic priorities is ‘supplementing our organic growth through acquisitions’, in order to satisfy our determination to build significant value for our stakeholders.

Our strong Advanced Wound Management division has been consistently outperforming the market growth rate for the last few years. This is despite not having a presence in bioactive wound healing, which has an estimated segment size of around $1 billion and is the fastest growing segment of advanced wound care. Bioactives offer novel treatments for a range of hard to heal wounds, including the large and increasing prevalence of diabetic foot ulcers.

In Healthpoint, we have found the ideal entry into this attractive segment. It is complementary on many levels, including product range, US scale and strong commercial capabilities.

Healthpoint is forecast to generate around $190 million sales in 2012 from its existing range of high growth products, driven by SANTYL, a bioactive ointment for the removal of dead tissue in wounds. Healthpoint has a strong R&D capability with its lead product candidate entering Phase 3 trials for the treatment of venous leg ulcers, a large potential opportunity.

The combination creates a wound business which is unique – having leadership positions across exudate and infection management, negative pressure and bioactive wound care.

Details of Healthpoint
Healthpoint is a privately held company focused on the development and commercialisation of novel, cost-effective bioactive solutions for debridement, dermal repair and regeneration.

Its principal marketed product is Collagenase SANTYL® Ointment (“SANTYL”), an enzymatic debrider for dermal ulcers and burns. Healthpoint’s offering also includes the OASIS® family of leading acellular skin substitutes for venous leg ulcers and diabetic foot ulcers and REGRANEX®, a growth factor for treating diabetic foot ulcers.

The company’s research and development strategy is centred on next-generation bioactive therapies for the treatment of chronic wounds. The principal pipeline product is HP802-247 for the treatment of venous leg ulcers, using cell-based therapy containing keratinocytes and fibroblasts. In August 2011 Healthpoint reported positive data from a Phase 2b clinical trial for HP802-247 in the treatment of venous leg ulcers, demonstrating that the compound met both its primary and secondary endpoints. The compound has recently entered Phase 3 trials for this indication and commercial launch could occur as early as 2017.

Healthpoint has its headquarters in Fort Worth, Texas and is an affiliate company of DFB Pharmaceuticals, Inc. It has approximately 460 employees, including an established sales force of 215.

Healthpoint generated revenues of $151 million in the year to 31 December 2011 and is forecast to deliver around $190 million in 2012. We expect that Healthpoint’s current product portfolio will deliver growth at a mid-teen percentage rate for the next few years. It delivered a trading profit of $11 million ($34 million before R&D expenses) in 2011. We expect to realise the benefit of the significant operational gearing in Healthpoint’s cost structure.

As at 31 December 2011, Healthpoint had gross assets of $98 million and net operating assets of $61 million. All figures are unaudited.

Integration plans
Smith & Nephew intends to build upon Healthpoint’s strong presence in the US, established commercial organisation and complementary product range. The business will continue to be headquartered in Fort Worth.

We will continue to invest in Healthpoint’s bioactive R&D capability, including funding the HP802-247 Phase 3 trials and commercialisation over the next 5 years. We expect this investment will drive annual R&D spend in the medium term to around $40-50 million per annum.

Healthpoint will be integrated into our Advanced Wound Management division. In order to minimise business disruption, we intend to integrate gradually. We expect to achieve annual cost synergies of around $20 million by 2015 and incur integration cash costs over this period of around $25 million.

Financial implications
The purchase price of $782 million in cash will be financed from Smith & Nephew’s existing cash resources and bank facilities. In the event that the transaction is not completed by the end of 2012, a further $10 million consideration will be paid.

The transaction is value and growth enhancing for Smith & Nephew. It is expected to generate a return exceeding Smith & Nephew’s cost of capital in the third full year following acquisition, and to be broadly EPSA neutral in 2013 and accretive thereafter, including the significant R&D investment in HP802-247.

The acquisition is structured as the purchase of assets (mainly in US), which will provide Smith & Nephew with a material cash tax benefit.

Smith & Nephew expects the anti-trust clearances and other customary requirements, to be fulfilled in time to enable completion of the transaction by the end of 2012.

Deutsche Bank is serving as financial adviser to Smith & Nephew on the transaction and BofA Merrill Lynch and JP Morgan as financial advisers to Healthpoint.

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