Smith & Nephew pays £39m for US bone-grafting firm

The knees-to-hips group Smith & Nephew bought a US bone-grafting firm, OsteoBiologics, yesterday, paying $72.3m (£39.2m) in cash even though its sales last year were only $3.3m.

S&N defended the expensive acquisition by stressing that its technology is innovative. It expects OsteoBiologics' sales to grow quickly in the next few years when its products, which are still being out rolled out in Europe and the US, are marketed by S&N's big sales team. That means after delivering a $7m hit to S&N's earnings in the second half of this year, the acquisition is expected to have a "broadly neutral" impact on group figures next year.

The Texas-based company manufactures a range of absorbable bone graft substitutes to repair cartilage defects in the knee, as well as a bone void filler. Michael King at Nomura Code predicts $20m of sales for OsteoBiologics products next year and $28m in 2008. He said the firm fitted well with S&N's portfolio. Repair products make up about 30 per cent of the group's endoscopy sales and have been driving the performance of the division for the last few years, delivering revenue growth in the high teens.

S&N is under pressure to buy in new technologies and diversify its portfolio as its main markets are slowing, despite ageing populations. As artificial hips and knees are expensive and health authorities around the world are on a cost-cutting drive, they will either try to cut the number of procedures they perform or push for big discounts from medical equipment makers.

S&N sees a huge growth opportunity. Currently, less than 20 per cent of cartilage defects in the knee are treated due to the lack of an effective and patient-friendly solution. The company reckons there are more than 1 million knees worldwide that could be treated with OsteoBiologics products. A procedure typically costs $1,000. Cartilage defects can lead to osteoarthritis.

However, Navid Malik at Collins Stewart said: "I don't think the technology is proven. They may not get the sales growth they are expecting."