Smith & Nephew CEO: Lack of innovation begats plunging industry margins

The medical device industry is boring. It doesn't innovate. And that, rather than government austerity, is why companies continue to face falling margins. Before you write that off as a conclusion coming from an outside consultant, consider that it comes from one of the industry's major figures: Smith & Nephew ($SNN) CEO Olivier Bohuon.

Bohuon, CEO since April 2011, tells Financial Times that the industry should essentially stop whining about government cutbacks in funding for health-related services, and blame itself for not coming out with state-of-the-art, game-changing products that can transform the delivery of health care for the better, and perhaps even reduce health care costs in the long run.

"When we talk about price erosion--3% to 4%--many people are blaming this on government austerity measures, but they are wrong," the Financial Times quotes Bohuon as saying. "What is happening is that we as an industry are not bringing in enough innovative products to get higher prices…Innovation is the bread and butter of this business."

Bohuon tells the esteemed financial newspaper that healthcare providers would pay lots of money (a premium, actually) for devices that would save them money. Without more aggressive innovation, he argues that companies are left with having to drop prices to maintain their success, leaving tighter margins.

So is Bohuon practicing what he preaches? He claims so. The company, for example, said it would boost its R&D spending by $300 million over the next 5 years so the R&D budget represents 5% of group revenues, the story notes. And the company is focusing more beyond its traditional artificial hip and knee areas toward innovative areas such as sports medicine, orthopedics and wound care, according to the article. Of course, the company is also trying to boost margins through hundreds of job cuts, a far less interesting way to go than innovation.

Still, early results are promising. The company said its sales in knees, sports medicine joint repair and advanced wound management all helped revenue grow by about 3% during its 2012 first quarter, to about $1.08 billion. That number may not be huge. But individual sectors such as sports medicine joint repair grew by 7%, however, and advanced wound management jumped by a healthy 5%.

- read the Financial Times article (sub. req.)