Smith & Nephew Plc · LSE:SN.
Smith & Nephew — Merger or Acquisition (June 2003)
44 slides from Smith & Nephew's merger presentation, Jun 17, 2003
Slide 1: June 2003
June 2003 Smiths-Nephew
Slide 2: Disclaimer
Disclaimer Smith}Nephew
Slide 3: Smith & Nephew Investment Profile
Smith & Nephew Investment Profile Global high growth advanced medical devices company No 1 in Wound Management and Arthroscopy and No 6 but fast growing in Reconstructive Orthopaedics £1bn in sales 18% EBITA £3!/, bn capitalisation. Listed in London & New York FTSE 100, Euro top 300, Morgan Stanley
Slide 4: Proven M&A Track Record
Proven M&A Track Record = iw a 4 | 8 acquisitions since 1999 | All successfully integrated | 4 divestitures in same time period | 1 complex cross-border joint venture transaction Smith}Nephew
Slide 5: The shape of Smith & Nephew 2002
The shape of Smith & Nephew 2002 = Vow ae Businesses Geography Orthopaedics Africa, Asia ea 70m 52000 & Australasia and trauma preducts £154m + 16%. America £611im + 15% Europe £319m Wound a +12% Management Seapets £322m +119 eee ‘Advanced treatments Tavasve surveey for hard to heal wounds Note: Sal
Slide 6: Smith & Nephew environment
Smith & Nephew environment = iw ae | Demographics and life styles drive market growth | Markets receptive to technology | Moderately positive pricing | Opportunities for share gains and market expansion Smith}Nephew
Slide 7: Centerpulse
Centerpulse =— iw ae Leading reconstructive implant company - £396m sales +14% | No 1 in Europe with 2296 market share No 5 globally, No 6 in US | Strong reputation in tribology (science of wear), particularly in hips Platform in spine - £77m sales +10% | Global No 5 in spine (796 market share) | Le
Slide 8: Smith & Nephew / Centerpulse Transaction Rationale
Smith & Nephew / Centerpulse Transaction Rationale | Creates world No 3 in $14 billion orthopaedics market | Transforms scale in reconstructive implants | Complementary product strengths and technological focus | Geographic fit brings market leadership in Europe and strengthened position in US and J
Slide 9: Transaction Details
Transaction Details | Headline Offer price for Centerpulse shareholders of CHF 282 = Vi Pw ae | Values Centerpulse at CHF 3.3 billion (£1.5 billion) | Multiple of 12.6 times Centerpulse’s 2002 continuing EBITDA | Centerpulse and InCentive shareholders’ pro forma ownership of 24% of Combined Group |
Slide 10: Shape of Combined Group
Shape of Combined Group = iw ae | 5 business divisions: Orthopaedics, Wound Management, Endoscopy, Spine and Dental | Approximately 74% of revenues from broad Orthopaedics | Maintain strong growth in Wound Management and Endoscopy 2002 SALES ‘SMITH & NEPHEW: £1.1 billion CENTERPULSE: £0.5 billion EN
Slide 11: Financial Overview
Financial Overview =— iw ae | Creation of £1.6 billion sales revenue business | 74% orthopaedics, arthroscopy, spine and dental | Similar growth +14% and EBITA margins 18% 2002 Dec y/e (Em) Smith & Nephew — Centerpulse —Pro-forma ém ém ém Sales (continuing operations) 1,084 533 1617 Underlying growt
Slide 12: Orthopaedics margin target and cost savings
27% Orthopaedics margin target by _ 23% Group 2005/06* £45 million margin target annual cost by 2005/06* savings by 2005 Growth ‘Transfer of est practice Long * Gperating margin before amortisation af goxdwil and exceptional tems Smith++Nephew
Slide 13: Cost Savings
Cost Savings ja” | Net sales dissynergies peaking at 1% of Ortho sales in 2004 | Annual cost savings of £45m anticipated by 2005 | Manufacturing, logistics, R&D | Corporate, administration | Exceptional cash costs of implementation: £130m, a 35% return | Non-cash costs still to be determined Smith}N
Slide 14: Financial Benefits
Financial Benefits | Margin improvement | Overall Combined Group operating margin target rises to 23% by 2005/06" | Combined Orthopaedics margin target rises to 27% by 2005/06" | Stronger cash flow conversion | Maintained 29% tax charge going forward | ROIC meets WACC in 2005 | Earnings per share” |
Slide 15: Management and Board
Management and Board | Chairman: Dudley Eustace | Chief Executive: Chris O’Donnell | Finance Director: Peter Hooley | Centerpulse directors to join Smith & Nephew Group Board | Max Link to be appointed a Vice Chairman | René Braginsky to be appointed a non-executive director Smith}Nephew
Slide 16: Zimmer counteroffer for Centerpulse
Zimmer counteroffer for Centerpulse = Vi Pw ae Await details of formal offer Decide best actions for shareholder value Centerpulse good complementary fit for Smith & Nephew and accelerates critical mass and margin achievement Smith & Nephew success not dependent on Centerpulse Strong underlying busi
Slide 17: Smith & Nephew vs Zimmer offers
Smith & Nephew vs Zimmer offers = Vi Pw ae Smith & Nephew Zimmer | Recommended offer | Hostile offer | Strong business and cultural fit | High implementation risk | Supportive sales reps and surgeon | Sales rep and surgeon communities overlap | Scope for above market growth in | Slower growth from c
Slide 18: Outline Timetable
utline Timetable 19 May: Smith & Nephew shareholder approval obtained | Smith & Nephew regulatory clearance already achieved | 17 June: Zimmer formal offer expected, Smith & Nephew bid automatically concurrent with Zimmer | 1 July: Offer period expected to begin | 31 July: Last date for third party
Slide 19: Appendices
=— iw 4 Appendices Smith}Nephew
Slide 20: Smith & Nephew
Smith & Nephew Smith}Nephew
Slide 21: JAchieve computer-assisted hip application
JAchieve computer-assisted hip application Other 13% —__stiyker 19% Centerpuse 7% smith & Nephew oe DePuy (283) syrthes 9% ie Biomet 11% Zimmer 14% Market (ex spine) £5.2bn + 13% Smith & Nephew sales 2002 +20% Hip Rangel New products 27% of sales Genesis Oxinium Knee Smith}Nephew
Slide 22: Baby boomer demographics
sy 22 12 10 oN BOO 1997 1998 1999 2000 2001 2002 Yet to see full impact of baby boomers 55-74 age group to rise 13% over next 5 years (6% last 5 years) Further 35% growth by 2015 Smith}Nephew
Slide 23: Reconstructive implants
Reconstructive implants a 7: | 67% of total orthopaedic sales (knees 38%, hips 26%) | Fastest growth in industry, knee implants +23%/hip implants +17% | Expanding procedure base | Continuing mix shift to higher margin implants | Favourable pricing environment | New product momentum 2003 | Oxinium fe
Slide 24: Trauma: 33% of total orthopaedic sales
| 33% of total orthopaedic sales | TriGen intramedullary nailing | External fixation | Ultrasound healing | Trauma growing 10% - in line with market | New product momentum 2003 | Jet X unilateral external fixation device | Computer-assisted trauma surgery and instrumentation Jet X | Increase focus t
Slide 25: Divisionalisation
Divisionalisation Trauma and Reconstructive Divisions | Focused approach to global product GY development, marketing and sales | To improve customer responsiveness and Uni Knee QO bring technology to market faster Synergy Hip | Phasing in separate specialist trauma and reconstructive sales forces in
Slide 26: Endoscopy market and share
others 11% Smith & Nephew Arthrocare 6% 35% Mitek (081 10% Stryker 12% Arthrex 12% Linvater 14% » Total Endoscopy market £3bn +6% Arthroscopy market £650m +6% TAINED ABS Smith & Nephew sales 2002 +10% New products 18% of sales Trivex Varicose Vein System Smith}Nephew
Slide 27: Endoscopy: significant growth
Significant growth in: | Knee and shoulder repair at 21% | Pioneering new surgical techniques ORATEC acquisition adds 9% with integration proceeding well New product momentum 2003 | FastFix AB meniscal repair system | Suretac III system | Quick T fixation device | TriVex UniSystem Digital OR opportu
Slide 28: Advanced Wound Management market and share
Dermagraft Acticoat shares ‘Smith & Nephew Others 25% ane aM 11% 18 16% Convatec 2% KCI 14% © Market £1.5bn + 12% © Smith & Nephew sales 2002 +11% + New products 6% of sales Smith}Nephew
Slide 29: Advanced Wound Management
Advanced Wound Manageme bor” Focused on hard to heal wounds (chronic ulcers, diabetic ulcers, burns) Large unconverted market plus new markets The experts — with full sector representation Full control of Dermagraft and unique technology New product momentum 2003 | Allevyn relaunch plus new variants
Slide 30: Sales force strength
Sales force strength 30 2490 +12% 2220 . +12% Orthopaedics Endoscopy 1306 Wound Management +4% Indirect Markets +7% 2001 2002 Smiths-Nephew
Slide 31: Group core technologies
Group core technologies = iw ae Long term research for organic growth a1 | Bioresorbables — to facilitate healing/surgical reconstruction | Tissue engineering — to replace, repair and regenerate | Non-invasive devices to stimulate tissue repair Smith}Nephew
Slide 32: Acquisition strategy
net acquisition strategy | To augment organic growth | Product/technology focus | Global commercialisation | Rapid integration | License new technologies | Alert to strategic opportunities that strengthen businesses long term Smith}Nephew
Slide 33: Margin Expansion
Margin Expansion 7.8% Moderate selling price increases Sales force productivity Product mix — higher technology Manufacturing and operational efficiencies 5, “Saag Integration benefits SG&A and dissynergies leverage Dermagraft profitability ise 1899 zo) 002002 Note: Operating profit (before goodwill
Slide 34: Highlights 2002
highlights 2002 Sw ae | 14% underlying sales growth | Acquisitions add 4% to sales | Ongoing operating profit +15% (18% margin) | Integration of ORATEC and Dermagraft on plan (underlying +19%) | Pre-goodwill amortisation earnings per share growth 15% Smith}Nephew
Slide 35: Underlying sales growth by business
35 FY 2000 FY2001 ~~ FY 2002 Acquisitions Currency Reported Underlying Underlying Undeyng = % % % % % Orthopaedics 10 18 20 - @ 16 Endoscopy 8 il 10 9 @ 1s advanced Wound Management ct co acy 4 @ 13 *10 14 14 4 @ 1s >* adjusted for ongoing business ‘Smith:Nephew
Slide 36: Trading results
Trading results Sales ‘Ongoing 943 1084 +15% Divested Ags 26 ToBz Ti Profit before exceptionals and amortisation ~~ ‘Ongoing 71 196 +15% Divested 14 2 Joint Venture and Associate 13 i 198 223 Interest a7 (aa) Wi OH EPS before exceptionals and amortisation 1396p 16.02p +15% Dividend 4.65 4.80 Excepti
Slide 37: Geographical underlying sales growth
Geographical uNcedying sales gr wt Total Growth America Growth Europe Growth AAA Growth £m o% £m o% £m % fm % Orthopaedics 470 20% 310 22% 95 14% = 65-17% Endoscopy 292 10% 191 8% 66 14% == 34 13% Advanced Wound 322, 11% 110 8% 188 11% «= 55 18% Management 1084 14% 611 15% 319 12% 154 16% Smith}Neph
Slide 38: Business unit profitability
Business unit profitability Sales EBITA Margin im ém % 2002 Orthopaedics 470 98 20.9 Endoscopy 292 54 18.4 Advanced Wound Management gee 44 13.7 1084 196 18.1 2001 Orthopaedics 405 83 ae Endoscopy 253 47 18.5 Advanced Wound Management 285 36 12.6 943 171 18.1 Before exceptional iterns and goodwill a
Slide 39: Cash flow
Cash flow 2001 2002 ém ém Trading cash flow 143 142 Rationalisation and integration (24) as) ‘Operating cash flow “119 “123 Joint venture: 13 10 Interest, tax and dividends (135) (106) Divestments and shares 70 7B Acquisitions 9) (208) Net cash flow ~@ aon Currency ©) 68 ‘Opening debt (236) (244) Cl
Slide 40: Retained profit and capital employed
Retained profit and capital employed =— | Praft before martction Teerate Amartiation Proftbefere exceptional tems Teerate Exceptional tems raft before tx Texation Prof ar tax Dividends Retained proft Goodall on divestments others ‘Opening capital and reserves Closing capital and reserves Net dabt Ca
Slide 41: Other items
Other items | Capital expenditure 75 85 | Depreciation 60 57 | Goodwill amortisation 10 18 | Currency in profit - transactional (cost) ® @ - translational gain (cost) 3 @ | Pension plan charges ~ SSAP 24 basis 5 8 =FRS 17 basis 7 10 net assets, = SSAP 24 basis 10 (@0) -FRS_ 17 basis (0) qt) | Except
Slide 42: Medical devices v pharmaceuticals
Medical devices v pharmaceuticals = iw ae Medical devices | Significant number of products | Build off platform technologies | Low/medium R&D spend | Longer product life cycles | Consistent sales performance Pharmaceuticals Small number of products (whilst covered by patent) Individual product devel
Slide 43: New products 2003
New products 2003 Qi =— iw ae Q2 Q3 Q4 Oxinium Femoral Heads (Ortho) Jet X Unilateral External Fixation device (Ortho) ‘Suretac III System (Endo) Quick T Fixation Device (Endo) Allevyn relaunch plus new variants (WM) Mini Incision Hip (Technique and instrumentation ) (Ortho) FastFix AB Meniscal Repa
Slide 44: Top product growth rates
44 1. Genesis It knees +1796 8. Exogen ultrasound +24% Allevyn dressings +23% 9. Supartz joint fluid NAL 3. Reflection hip cup +219 110. Endo service visualisation +1996 4. TriGen nails +59% 5, Synergy hs +3196 6. Cruciate fixation +2496 ‘oxinium knees NAL Note: Products and ranges above £10m in ord
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