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VOL. 126 | NO. 245 | Friday, December 16, 2011

Smith & Nephew Cuts Part of Tough Year for Industry

By Aisling Maki

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Smith & Nephew is the latest medical device maker to cut Memphis jobs in what’s proven to be a formidable year for the industry.

The London-based company Tuesday, Dec. 16, reduced its workforce by about 80 at its Memphis-based orthopedics unit, where it employs roughly 2,000 people.

In February, Medtronic Inc. – whose Spinal and Biologics Business is based in Memphis – announced it would reduce its global workforce by 1,500 to 2,000 employees, or 4 to 5 percent, restructuring its business in order to align its cost structure to market conditions.

And in September, Arlington-based Wright Medical said it would cut its workforce by 6 percent, or about 80 employees, as part of a cost restructuring plan to promote growth, profitability and build shareholder value.

Smith & Nephew’s recent round of layoffs were in various departments, and spokesman Andrew Burns said the company is facing a challenging economic environment, regulatory environment and ongoing cost of pressure in its established market.

In August, Smith & Nephew announced it was combining its Memphis-based Orthopaedic Reconstruction and Trauma division with its Andover, Mass.-based Endoscopy division to form a new division known as the Advanced Surgical Devices Division.

“It’s a single division with two locations, and we remain heavily invested in Memphis – there’s no change there,” Burns told The Daily News.

He also said the layoffs eliminated the duplication of roles in Memphis and Andover, which also saw job cuts this week.

The Memphis-based position of president of Orthopaedic Reconstruction and Trauma was eliminated this summer, and the Advanced Surgical Devices Division is headed by Andover-based Mike Frazzette, who had led the company’s endoscopy division since 2006.

“We are always saddened and concerned to hear about anyone losing their jobs, especially at this time of year,” said Mark Herbison, senior vice president at the Greater Memphis Chamber. “We are already working with Desi Franklin and her team at the Workforce Investment Network to make sure these people will know what services are available to them to bridge the gap during this difficult time. We are also continually working with the leadership at Smith and Nephew to make sure that their operations here in Memphis are strong and profitable and hopefully when the economy strengthens, these jobs might return to our community.”

Julie Stralow, an equity analyst with Morningstar Inc. in Chicago, said the 80 layoffs in Memphis represent less than 1 percent of Smith & Nephew’s worldwide workforce.

“We see this decision as a continuation of Smith & Nephew’s efforts to restructure its orthopedic and endoscopy divisions into one segment,” Stralow said. “By making these workforce adjustments, the firm aims to become a more efficient organization.”

Last month, Smith & Nephew reported strong third-quarter revenue growth, but said its Memphis-based orthopedics division underperformed for the period, as evidenced by trading margins of 15.6 percent compared with 22.2 percent in Q3 2010.

Dr. Cyril Chang, director of the Methodist Le Bonheur Center for Healthcare Economics at the University of Memphis’ Fogelman College of Business & Economics, said that, given the anemic economic recovery, jobs cuts resulting from corporate restructuring strategies are a given.

“Knowing the national trends in health care in the broad sense, companies – in order to excel and remain viable in the environment – must look at their cost structure and production models carefully in order not to have any waste,” Chang said. “These types of things are to be expected in a very competitive industry.”

Although he doesn’t expect that trend to change much in the coming year, he does expect things to improve further down the road for the health care industry, which employs one out of every seven workers in Memphis.

“Of course, you will have these types of efficiency related adjustments of manpower needs here and there – you will see that,” Chang said. “But long-term, I don’t see a reduction in health care spending in the United States and around the world. Long-term, the total demand for medical devices and health care services in general will continue to be strong.”

Chang said health care will remain more stable compared to other industries, such as real estate and housing construction.

“The financial outlook for health care in general and the medical device industry in particular is cloudy in the short-run, but we have a pretty bright future,” Chang said.

Emerging markets such as China, India and Brazil, home to growing middle classes, are expected to play a key role in the future of the American health care industry, particularly for makers of devices and pharmaceuticals.

Burns said Smith & Nephew’s restructuring will allow the company “to invest more in emerging markets, where there’s greater potential for growth right now,” and Chang said emerging markets “will become increasingly more important for the medical device industry, but the American market will continue to provide the bread-and-butter profit margin.”

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