-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FuSB//Sb7jtMwyr5lpN0OQOnH6gvKf+7ulA+5Zrza8wWJZT4ddHA/6uFDhFBxc4R wOa/PPPL6fubqRedZvco+g== 0000950131-02-000594.txt : 20020414 0000950131-02-000594.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950131-02-000594 CONFORMED SUBMISSION TYPE: SC TO-C PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20020219 GROUP MEMBERS: ORCHID MERGER CORP. GROUP MEMBERS: SMITH & NEPHEW, INC. FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: SMITH & NEPHEW PLC CENTRAL INDEX KEY: 0000845982 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-C BUSINESS ADDRESS: STREET 1: 2 TEMPLE PL CITY: LONDON ENGLAND WC2R STATE: X0 ZIP: 00000 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ORATEC INTERVENTIONS INC CENTRAL INDEX KEY: 0001037165 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 943180773 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC TO-C SEC ACT: 1934 Act SEC FILE NUMBER: 005-60941 FILM NUMBER: 02552480 BUSINESS ADDRESS: STREET 1: 3700 HAVEN COURT STREET 2: 415-369-9904 CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 6503699904 MAIL ADDRESS: STREET 1: 3700 HAVEN COURT CITY: MENLO PARK STATE: CA ZIP: 94025 SC TO-C 1 dsctoc.txt COMMUNICATION RELATING TO THIRD PARTY TENDER OFFER = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - - - - - - - - - - SCHEDULE TO (RULE 14D-100) TENDER OFFER STATEMENT UNDER SECTION 14(d)(1) OR SECTION 13(e)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 - - - - - - - - - - ORATEC INTERVENTIONS, INC. (Name of Subject Company (Issuer)) ORCHID MERGER CORP. SMITH & NEPHEW, INC. SMITH & NEPHEW PLC (Names of Filing Persons (Offerors)) - - - - - - - - - - COMMON STOCK, PAR VALUE $.001 PER SHARE (Title of Class of Securities) - - - - - - - - - - 68554M (CUSIP Number of Class of Securities) - - - - - - - - - - James A. Ralston, Senior Vice President and General Counsel Smith & Nephew, Inc. 1450 Brooks Road Memphis, Tennessee 38116 (901) 399-5000 (Name, address and telephone number of person authorized to receive notices and communications on behalf of filing persons) Copy to: Pran Jha Sidley Austin Brown & Wood Bank One Plaza 10 South Dearborn Street Chicago, Illinois 60603 Telephone: (312) 853-7000 CALCULATION OF FILING FEE Transaction Valuation: Not Applicable Amount of Filing Fee: Not Applicable - ---------- [_] Check the box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount previously paid: Not applicable Filing Party: Not applicable Form or registration No.: Not applicable Date Filed: Not applicable [X] Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer. Check the appropriate boxes below to designate any transactions to which the statement relates: [X] third-party tender offer subject to Rule 14d-1. [ ] issuer tender offer subject to Rule 13e-4. [ ] going-private transaction subject to Rule 13e-3. [ ] amendment to Schedule 13D under Rule 13d-2. Check the following box if the filing is a final amendment reporting the results of the tender offer: [ ] = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = Item 12. Exhibits -------- Exhibit 99.4 Transcript of Smith & Nephew's webcast of conference call. EX-99.4 3 dex994.txt TRANS OF SMITH & NEPHEW'S WEBCAST OF CONF. CALL Exhibit 99.4 This presentation is neither an offer to purchase nor a solicitation of an offer to sell shares of ORATEC. At the time a subsidiary of Smith & Nephew commences its offer, it will file a Tender Offer Statement with the Securities and Exchange Commission and ORATEC will file a Solicitation/Recommendation Statement with respect to the offer. THE TENDER OFFER STATEMENT (INCLUDING AN OFFER TO PURCHASE, A RELATED LETTER OF TRANSMITTAL AND OTHER OFFER DOCUMENTS) AND THE SOLICITATION/RECOMMENDATION STATEMENT WILL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. The offer to purchase, the related Letter of Transmittal and certain other offer documents, as well as the Solicitation/Recommendation Statement will be made available to all stockholders of ORATEC, at no expense to them. The Tender Offer Statement (including the Offer to Purchase, the related Letter of Transmittal and all other offer documents filed with the Commission) and the Solicitation/Recommendation Statement will also be available for free at the Commission's Web site at www.sec.gov 1 1 TRANSCRIPT OF INTERNET BROADCAST OF SMITH & 2 NEPHEW'S CONFERENCE CALL ON THE ACQUISTION OF 3 ORATEC INTERVENTIONS, INC. 4 5 THURSDAY, FEBRUARY 14, 2002 6 9:00 A.M. GMT 7 8 9 HOSTED BY: MR. CHRISTOPHER O'DONNELL, 10 MR. PETER HOOLEY, 11 MR. RON SPARKS. 12 13 14 15 16 17 18 19 20 21 22 23 24 2 1 THE MODERATOR: Good day, everyone, and 2 welcome to the Smith & Nephew conference call. 3 Hosting the call today will be 4 Mr. Chris O'Donnell, Smith & Nephew's chief 5 executive, Mr. Peter Hooley, finance director, 6 and Mr. Ron Sparks, president of Smith & Nephew 7 Endoscopic. 8 At this time, I would now like to 9 turn the conference over to Mr. O'Donnell. 10 Please proceed, sir. 11 MR. O'DONNELL: Good morning, everybody, at 12 varying times in the morning, particularly for 13 those who are joining us from the United States. 14 We have to say we are a little bit 15 sorry about the timing of this. We were trying 16 to get it all done and dusted for some time last 17 night, but negotiations sometimes take a little 18 bit more time to complete and they were actually 19 completed in the middle the night U.K. time. 20 We are making this call today to 21 announce the acquisition of ORATEC 22 Interventions, Inc., for the offer for 23 acquisition by Smith & Nephew. 24 It is being web cast. The web cast 3 1 is manually driven, so anybody watching using 2 the web cast will need to turn to the next page. 3 So, first of all, we are announcing 4 our tender offer which is valued in total at 5 $310 million, $12.50 a share for ORATEC. 6 We are very pleased with this 7 proposal. It has major advantages for our 8 Smith & Nephew endoscopy division. It gives a 9 leadership position in radio frequency in 10 arthroscopy, a new position in the emerging 11 minimally invasive spine market, strong 12 potential using this technology for other 13 endoscopic procedures, substantial global 14 distribution leverage opportunities, and, 15 significantly, integration benefits. It will be 16 earnings enhancing pre good will in its first 17 full year. 18 So we are delighted by this, and this 19 acquisition has been led by our endoscopy 20 division. I'm delighted that Ron Sparks is now 21 able to join us to tell you more about it. 22 Please turn to the next slide. Ron? 23 MR. SPARKS: Thank you very much, Chris, 24 and good morning, everyone. 4 1 This is Ron Sparks speaking and, 2 first of all, I'd like to start off by telling 3 you a little bit about -- or reminding you 4 really about Smith & Nephew Endoscopy and who we 5 are. 6 Smith & Nephew Endoscopy, as many of 7 you know, is the world's only comprehensive 8 technology company as it relates to endoscopy. 9 In fact, we are the only business that has all 10 of the key technologies under one roof -- 11 access, visualization, resection, and repair. 12 And by "repair," we mean soft tissue 13 repair. 14 Furthermore, I think that many of you 15 also know that we have a very strong focus from 16 a strategic point of view on bringing new 17 technique to market, and I think that our 18 arthroscopy leadership position has been built 19 on that. 20 Also, we are very much a leader in 21 the vascular surgery market as it relates to 22 endoscopy and have brought very leading edge and 23 innovative techniques to the market in specialty 24 abdominal products, with products like HandPort, 5 1 all of this backed up with a very strong product 2 line. 3 In fact, many of you that are on this 4 call, I invite you to visit our digital 5 operating room, which we refer to as Digital OR, 6 at the Academy of Orthopedic Surgery. We have a 7 very leading edge program there to give all 8 endoscopic surgeons, regardless of their 9 specialty, the ability to get up and running in 10 the OR very quickly and easily. 11 In 2001 we had a sales growth of 14 12 percent, and I think on the slide that you all 13 have you can see both our market position in the 14 $5 billion endoscopic market as well as our 15 leadership position which is very strong in the 16 global arthroscopy market. 17 Next slide, please. 18 ORATEC Interventions is a very 19 exciting opportunity for us strategically and 20 strategically important, I might add. 21 I think ORATEC, as you can see on the 22 next slide, has a very focused arthroscopic and 23 spine product line. It has turnover of revenues 24 of about 48 million in 2001. 6 1 The products themselves have a very 2 unique feature in their temperature-controlled 3 feedback system which is used in capsulorraphy 4 in the arthroscopic segment. Also that's backed 5 by some very strong intellectual property. 6 They definitely are the innovator in 7 the tissue shrinkage area, again which we refer 8 to as capsulorraphy, and you can see that they 9 have a leadership position in the arthroscopic 10 radio frequency marketplace. 11 Next slide, please. 12 Also I think that one of the reasons 13 that ORATEC is very strategically important to 14 Smith & Nephew is that they bring to the 15 marketplace a minimally invasive spinal 16 procedure. 17 We have a very strong interest in 18 spine and more particularly a strong interest in 19 the emerging spinal market, and the emerging 20 spinal market is typified by the endoscopic 21 approach or minimally invasive approach to the 22 spine. 23 This is one of the fastest growing 24 segments -- in fact, probably the fastest 7 1 growing -- of the spinal market. 2 ORATEC offers a SpineCATH or 3 IntraDiscal ElectroThermal Therapy product, 4 which, in fact, holds the largest market share 5 in the minimally invasive spinal area. This 6 particular product uses heat to modify tissue in 7 the disk wall, which then reduces pain 8 significantly for the patient. 9 And I think that, again, one of the 10 very strong features that ORATEC offers Smith & 11 Nephew is a direct spinal sales force in this 12 particular area. We can use that and add that 13 to our current endoscopic power in arthroscopy, 14 vascular, as well as the specialty abdominal 15 area. 16 Also it's important to point out that 17 Smith & Nephew will continue to put a lot of 18 emphasis and strength behind the clinical 19 program which is needed to drive reimbursement 20 of that particular product. 21 Next slide, please. 22 Also I think that what occurs when 23 ORATEC is merged into Smith & Nephew is a very 24 strong picture as it relates to synergies. A 8 1 lot of very powerful synergies accrue to Smith & 2 Nephew, certainly from a financial point of 3 view, but also from a strategic point of view. 4 The very first one in the area of 5 technology is that when we are finished with 6 this you will have -- or Smith & Nephew will 7 definitely have one of the broadest RF 8 technology portfolios in the world. 9 I think that the strength of ORATEC 10 in some very strong areas like capsulorraphy and 11 spine combined with Smith & Nephew's own radio 12 frequency energy programs will put together the 13 broadest portfolio certainly as a technology 14 point of view in the medical device industry. 15 On the synergy side as well in the 16 sales area, obviously Smith & Nephew's strength 17 in arthroscopy is the number one sales force in 18 the world by a factor of two. And putting 19 ORATEC Interventions together with Smith & 20 Nephew gives immediate strength to their 21 arthroscopic product offering, and then, of 22 course, we add to that, as I mentioned earlier, 23 specialty spinal strength in our selling 24 capability in the marketplace which we will use 9 1 to leverage future growth, both in IDET as well 2 as in new techniques that we offer in the spine. 3 On the operations side, Smith & 4 Nephew, as many of you know, already produces a 5 number of electronic-type products. The 6 electronic assembly is something we currently do 7 in many of our products, and so this is a very, 8 very synergistic sort of merger between our two 9 businesses where we can pick up our strength in 10 those areas and apply them to ORATEC and get 11 very numerous financial benefits from economies 12 of scale putting together our leading position 13 in cost, quality, and service. 14 Finally on that slide, our ability to 15 bring new techniques to the market is 16 significantly enhanced with this particular 17 acquisition, and we can expand our product 18 offering very quickly into other areas of 19 endoscopy. 20 Next slide, please. 21 Expanding specifically on the 22 technology area, as I mentioned earlier, we were 23 really the only company in the world to offer RF 24 cutting, ablation, shrinkage. We have a very 10 1 important and powerful mechanical resection 2 product which combines mechanical resection and 3 radio frequency in a bipolar format which will 4 be launched very soon. 5 And, again, that product can be seen 6 currently at the Academy of Orthopedic Surgery. 7 We will be the only company providing 8 temperature control with feedback. Also this 9 acquisition gives us a very broad generator 10 knowledge base which can be used with all of the 11 products we have within the Smith & Nephew 12 family. 13 It will put us very quickly in the 14 number one position in minimally invasive spine 15 procedures. It offers a complete line of 16 arthroscopy tips as well as our ability to 17 transfer the catheter technology necessary into 18 new techniques and specialties, particularly as 19 it relates to the spine. 20 Finally, I think that it's important 21 to note that it will give us the position to be 22 first in the market with central and voice 23 control on radio frequency products. 24 Next slide, please. 11 1 On the sales synergy side, to expand 2 on that, I think that this particular 3 acquisition gives us the most comprehensive -- 4 or makes us the most comprehensive radio 5 frequency energy technology supplier in the 6 world. 7 No one else can cover this area like 8 we can, and certainly the technologies put us in 9 a position to draw in a way that no one else 10 has. 11 Obviously, as we mentioned earlier, 12 our world's largest arthroscopy sales 13 organization is a great opportunity for the 14 ORATEC product line as well as our experienced 15 direct U.S. sales organization for spine, which, 16 of course, accrues to us through this 17 acquisition. 18 We become through, again, this 19 acquisition as well as our own strength in the 20 area of training surgeons and doing teaching in 21 that area the leader in surgeon training, both 22 in arthroscopy spine as well as endoscopy. 23 And as you can see here, we will use 24 our position in the eFast programs, which is a 12 1 web-based financing system, in order to bring 2 ORATEC product to the market. 3 And then finally we have a very 4 comprehensive training capability, including 5 web-based training which will brought to bear. 6 Next slide please. 7 As you can see here, our 8 consolidation synergies which we refer to, again 9 as we talked before, we not only have the best 10 and broadest portfolio to relate to RF 11 technology, but it gives us the opportunity of 12 combining Smith & Nephew's research and 13 development capability in this areas with ORATEC 14 to create the world's best RF and 15 electromechanical endoscopic team in the 16 research and development area. 17 Also we have significant economies of 18 scale in marketing expenditures -- in both 19 marketing expenditures as well as in the sales 20 area, so that those economies of scale quickly 21 accrue to Smith & Nephew. 22 We do operate currently a world class 23 capital equipment assembly and quality control 24 area which will be brought to bear as it relates 13 1 to ORATEC, and then I think that our position as 2 a superior quality and cost management company 3 as well as the number one global service company 4 as it relates to, again, this area for strength 5 in arthroscopy as well as the broader endoscopic 6 market will be brought to bear in this area. 7 I think that it's important to point 8 out that we do have a very comprehensive 9 post-acquisition plan which will be executed 10 immediately. 11 And that is the end of my 12 presentation and I do appreciate you all coming 13 on so early if you are in the United States and 14 certainly good morning to everybody in the 15 United Kingdom and I'd like to turn the 16 presentation over to Mr. Peter Hooley, who will 17 help you through some of the numbers. 18 Thank you very much. 19 MR. HOOLEY: Thank you, Ron. Turn over to 20 the slide headed "Cost of Acquisition." 21 The acquisition is being effected by 22 a recommended cash tender offer that is 23 comprising 291 million for outstanding shares 24 and 19 million for the outstandings options. 14 1 The directors of ORATEC have agreed 2 to tender their shares representing 13 percent 3 of the equity, and the tender is being made no 4 later than the 25th of February and is aiming to 5 close come the end of March or the beginning of 6 April. 7 Scott is the only material external 8 condition and is on an accelerated 15-day 9 timetable, and you can see that the company 10 comes with 52 million of cash in short-term 11 investments, which basically gives a net 258, 12 which you'll see in the announcement. 13 The transactions costs, both ours and 14 ORATEC Advisors, as Ron says, there is an 15 immediate integration plan which we estimate 16 will cost something like 12 million to put into 17 effect. 18 If you turn over to the slide, this 19 slide gives a pro forma indication of ORATEC as 20 if it had been acquired for the whole of 2001. 21 It is purely illustrative to aid in 22 understanding. 23 It starts with their reported 48 24 million and an operating loss of 2 million in 15 1 2001. 2 You've heard we have a comprehensive 3 integration plan. In the first four years 4 integration benefits are assessed with the 5 overall of $11 million. This, as you can see, 6 gives an EBITDA positive of 9 million. 7 Interest at 4 percent on 281 comes 8 out at 11 million, and thus you can see it will 9 be marginally diluted in 2002. 10 ORATEC starts to become accretive in 11 2003. Our sales growth accelerates. This 12 accretion will come through both on the group 13 top line to margins and to EPS. 14 We are targeting sales growth of 15 something on the order of 10 percent in 2002 and 16 25 percent in 2003 as Smith & Nephew Endoscopy 17 picks up their arthro distribution both in the 18 United States and outside the United States. 19 This figure or these accretion 20 figures are before the benefits of utilizing 21 ORATEC's tax losses worth in cash terms around 22 about 5 million per annum. This is equivalent 23 to something like 2 percent of accretion in 24 economic terms and unfortunately doesn't come 16 1 through in accounting terms with the way 2 accounting works. 3 Finally, just to say the figure are 4 before amortization. That's about 12 million 5 per annum. 6 We are financing the acquisition of 7 ORATEC out of existing committed bank 8 facilities, and this will take our debt up by 9 Sterling 200 million to something like 450 10 million today. It stills leaves us with plenty 11 of debt capacity, and the interest cover is only 12 11 times. 13 With that, I'll pass it back to 14 Chris. 15 MR. O'DONNELL: Okay. Thank you, Peter. 16 Thank you, Ron. 17 We are very, very pleased with this 18 acquisition. It's an excellent strategic fit 19 for our endoscopy business. It is very strong 20 technologically, and we are pleased that we can 21 deliver both shorter term and longer term 22 synergy benefits to drive the earnings growth. 23 The timetable going forward is that 24 by February 25th or earlier we will actually 17 1 formally commence the tender offer for all of 2 ORATEC'S common stock, which is quoted on 3 Nasdaq, and this is expected to close in late 4 March or possibly early April of this year. 5 So hopefully we will get 6 approximately three quarters of sales of ORATEC 7 into our books in 2002. 8 With that, I'd like to turn the 9 presentation over to questions. 10 John, if you would give the necessary 11 instructions, please. 12 THE MODERATOR: Thank you, sir. 13 Ladies and gentlemen, if you'd like 14 to register a question for today's conference, 15 please press star follow by 1 on your telephone 16 keypads now. 17 If you would like to withdraw your 18 registration, please press star followed by 2. 19 If you are on a speakerphone, could 20 you please pick up your handset before entering 21 your request. 22 One moment, please, for the first 23 question. 24 Our first question comes from 18 1 Mr. Martin Hall from HSBC. 2 Please proceed, sir. 3 MR. HALL: Hello, gentlemen. I've 4 got three or four questions, if I may. 5 Firstly, what was the sales growth in 6 2001 over 2000? 7 Secondly, I've assumed that most of 8 the sales are being made in the United States. 9 How long will it be before you can roll out 10 these two products into the rest of the world's 11 markets? 12 And could you give some better 13 explanation of the integration costs? 14 When I look through the accounts now 15 for the last four years, we keep getting this 16 recurring integration costs for the group, and 17 I'd like to know a little bit more about where 18 these costs are going. 19 I assume that you want to keep most 20 of the staff here and, therefore, 11 million 21 seems a very high number. 22 And also, finally, does this move -- 23 it's a relatively large move for you, Chris. 24 Does this now limit any further moves 19 1 without recourse to shareholders for the rest of 2 the year? 3 MR. O'DONNELL: Let me deal with the 4 first -- the last one first, Martin. 5 No. First of all, this is a bigger 6 move than we have made in the past. We regard 7 this as a medium-sized acquisition in financial 8 terms. 9 As Peter indicated, we still have a 10 considerable borrowing reserve as far as our 11 ability to do further transactions this year 12 without recourse to share capital. 13 I'm going to ask Ron to comment on 14 rollout timing globally, and I'm going to ask 15 Peter to comment on the 2001 over 2000 sales. 16 With regard to the integration costs, 17 Martin, we have been -- we set out to manage the 18 portfolio very, very actively, and we have seen 19 both integration and divestment costs, runoff 20 costs, taken to the P&L, but that's a 21 consequence of having an active portfolio 22 stance. 23 And I think the shareholders have 24 certainly seen the value arising from that. 20 1 Hopefully they will see the value arising from 2 this. 3 There are some costs principally 4 arising in the U.S. that will relate to the 5 integration. We don't plan to go into details 6 of those until such time as the tender offer is 7 through and we are in a position to talk to 8 everybody on a known issue basis. 9 Ron, can you talk about rollout, 10 please? 11 MR. SPARKS: Sure. Yes, Martin, I think 12 that it's a great question because one of the 13 very significant benefits to us that's obvious 14 when you look at this business and all of its 15 businesses -- really, I mean, a small portion of 16 this business is outside the United States 17 currently. 18 So Smith & Nephew's strength in the 19 global marketplace is very strong. In fact, I 20 would say that particularly in the endoscopy 21 business we have probably the strongest strength 22 or the strongest capability in a global sense 23 compared to some of our competitors so we are 24 able to take the ORATEC product line into many 21 1 markets where it's not today. 2 Our plans start off relatively 3 modestly particularly in 2002, but we do see 4 very significant growth in the marketplaces 5 outside the United States beginning in 2003. 6 And those, of course, would be focus markets in 7 the major markets of the world like the United 8 Kingdom, Germany, France, Italy, for example, as 9 well as Japan and the Asian market. 10 And our ability to bring product into 11 those markets is very good, and so I think that 12 the shareholder will see benefits from that in a 13 very short period of time. 14 MR. O'DONNELL: Okay. Thank you, Ron. 15 Peter? 16 MR. HOOLEY: Sales growth 2001 over 2000, 17 sales declined 3 percent. The arthroscopy 18 business grew strongly at 11 percent, and the 19 spinal business was constrained by 20 reimbursement, as I said in the announcement. 21 MR. O'DONNELL: Okay, Martin? 22 MR. HALL: Thank you, Peter. 23 THE MODERATOR: Our next question come from 24 Mr. Michael Youngling from Merrill Lynch. 22 1 Please proceed, sir. 2 MR. YOUNGLING: Good morning. Just one 3 question in relation to the spinal business of 4 ORATEC. 5 I was looking at the quarterly sales 6 figures for 2001, and it appears we have had 7 sort of slowing sales growth from 6.2 million in 8 Q1 moving down to 4.8 million in Q4. 9 It seems that's sort of -- that sales 10 are slowing; and as you pointed out, I think 11 it's because of the lack of sort of formal 12 reimbursement from third-party payers. 13 Can you give us an indication as to 14 why you expect sales growth to accelerate in 15 2003? 16 MR. O'DONNELL: Right. Ron, would you like 17 to deal this with very important question? 18 MR. SPARKS: Sure. Thank you for that 19 question, Michael. I think that what we have 20 done is spent a lot of time and energy -- when 21 we looked at this acquisition, spent a lot of 22 time and energy on their reimbursement position. 23 And we believe that the clinical 24 trial program that is currently under way is 23 1 very strong. It's very well-organized and will 2 put us in the position that all of the payers 3 have asked for. They have been very specific 4 about their demands and requests. They say, 5 "Look. You've got to provide clinical data that 6 gives us what we need to prove that patients 7 need this particular method of care," and that 8 has been done. It's under way. 9 I believe -- we believe in all of our 10 work that it's going to show certainly the 11 third-party payers that this is a modality that 12 the patients need and will be very successful. 13 So that is very much under way, and 14 we do look for that information to be in the 15 marketplace, you know, within the next year or 16 two to a position where this product line will 17 grow very well. 18 Also, one of the strengths that we do 19 have as a company is our ability to get 20 reimbursement not just in the United States, but 21 right around the globe, so that also will 22 benefit the sales growth line. 23 MR. YOUNGLING: Just quickly, which study 24 are you -- what evidence are you waiting for? 24 1 What is the critical date which we as investors 2 or analysts should be hoping for to see perhaps 3 some positive news in relationship to a better 4 reimbursement environment for IDET? 5 MR. SPARKS: I think that you will see some 6 information this year -- this year being 2002 -- 7 and you will also see the benefit of a study in 8 2003. These will be published in peer review 9 journals, which is exactly what the payers have 10 asked for, and you'll see some of that 11 information both 2002 and 2003. 12 So it won't be that long -- certainly 13 before the end of the year -- that you'll be 14 able to put your finger on the information and 15 understand exactly what it tells you. 16 MR. YOUNGLING: Okay. Thank you. 17 THE MODERATOR: Our next question comes 18 from Mr. Alex Evans from Deutsche Bank. 19 Please proceed, sir. 20 MR. EVANS: Good morning. Just a quick 21 question. 22 I think you said the RF arthroscopy 23 market was $122 million in size. 24 I was just wondering what the growth 25 1 rate of that has been in recent years and also 2 what you see as sort of the potential for risk 3 in four or five years time. 4 MR. O'DONNELL: I think, Alex, the 5 spine -- the RF spine market -- sorry, the 6 minimally invasive spine market is about 120 7 million. I'm not sure we have given a number 8 for the RF arthroscopy market, but perhaps I can 9 just turn this over to Ron to give a view of 10 both of these areas. 11 MR. SPARKS: I think that we did give in 12 our chart, which basically was labeled ORATEC in 13 the very beginning, Chris, a view of the 14 arthroscopy market in radio frequency of 122 15 million. 16 The growth rates in this market are 17 in the middle teens at the current time, 18 certainly significantly ahead of some of the 19 more traditional product areas; say, in 20 arthroscopy as it relates to the cutting, like 21 rotary mechanical cutting; probably twice that. 22 And we believe that the growth rates 23 going out into the future will continue to be at 24 least twice what we have seen in the shaver and 26 1 blade business in this particular area. 2 The reason for that is that there is 3 a lot of penetration yet to come in using radio 4 frequency energy both in capsulorraphy as well 5 as in cutting and ablation as it becomes more 6 and more popular with surgeons around the world. 7 MR. EVANS: Thanks. 8 THE MODERATOR: Our next question comes 9 from Mr. Peter Lange from S.G. Callen. 10 Please proceed, sir. 11 MR. LANGE: My question has been answered. 12 Thank you. 13 THE MODERATOR: Our next question comes 14 from Mr. Hans Ostrom from Goldman Sachs. 15 Please proceed, sir. 16 MR. OSTROM: Good morning, gentlemen, and I 17 had a couple of questions. 18 First of all, regarding the RF 19 technology that you already have within the 20 arthroscopy field, how does the ORATEC 21 technology complement that or does it actually 22 help the technology that you have in-house 23 already? 24 And, secondly, could you shed some 27 1 more light on the cost savings that you are 2 expecting of 11 million? What does this 3 actually represent, if it had office closures of 4 ORATEC, or are there other issues involved there 5 as well? 6 MR. O'DONNELL: Ron, would you like to pick 7 up these two questions with regard to RF and 8 give some indications of how we think we can 9 leverage the business? 10 MR. SPARKS: Yes, I'll tackle them in 11 order. 12 First of all, it's a very 13 complementary line to our current radio 14 frequency energy program. Basically, our 15 bipolar energy tips will be able to work with 16 the current ORATEC generator product so that we 17 can quickly take our tip designs, which are very 18 popular with the surgeon -- certainly becoming 19 popular with the surgeon, I should say, because 20 they're relatively new in the marketplace, and 21 it offers them the opportunity to use them with 22 the ORATEC generator; plus we can combine that 23 with a number of ORATEC products in the same 24 area. 28 1 As it relates to -- the other thing 2 that I think it's important to point out there 3 is it gives us both the -- gives the surgeon/ 4 client the choice of having another generator 5 like an ORATEC generator or the face place that 6 we offer which can convert a standard radio 7 frequency generator that they would have 8 everyday for doing surgery -- just making simple 9 incisions, we can convert that to a bipolar 10 product as well. 11 So they can go whichever direction 12 they want and satisfy their needs, so in that 13 respect it's very complementary. 14 As far as the integration program and 15 some of the synergies, very simply put, our 16 business has all the strength necessary in the 17 sales and marketing area to be able to very 18 quickly absorb a business of this size without 19 additional costs; so in very simple words, we 20 are able to take costs out by eliminating any 21 duplication in the selling and marketing area 22 right away as well as, of course, in the 23 administrative area. 24 We have some duplications there as 29 1 well which we will be able to synergize. We 2 will put both programs together and not 3 necessarily have to have the same duplicate 4 expense that you'd see by adding the two 5 businesses together. 6 If we were different businesses, of 7 course -- if we were vastly different 8 businesses, then this would not be possible; but 9 because it's so strategic and fits so well 10 within our organization, we are able to take 11 those costs out immediately. 12 I think it also is safe to say that 13 at this point in time we would have to spend a 14 lot of time on integration plans and reviewing 15 those with a lot of folks and how exactly we are 16 doing to it, so it's very difficult at this 17 point in time to speak in more detail than that. 18 MR. OSTROM: Could you give us an idea of 19 how many additional generators that ORATEC can 20 place in the U.S. market in comparison to those 21 that you have using your own face plate? 22 MR. SPARKS: Again, I think that ORATEC 23 outnumbers the number of face plates in the 24 marketplace probably by a factor of five, maybe 30 1 more than that. 2 MR. OSTROM: How much? Five, did you say? 3 MR. SPARKS: Five times, yes. 4 MR. OSTROM: Okay. Thank you. 5 THE MODERATOR: Ladies and gentlemen, as a 6 reminder, to register for a question for today's 7 conference, please press star followed by 1 on 8 your telephone keypads. 9 Our next question come from Mr. 10 Jeremy Green from Salomon Smith Barney. 11 Please proceed, sir. 12 MR. GREEN: Good morning. I had a couple 13 of very quick questions. 14 The first is at the previous Academy 15 of Orthopedic Surgeons, Ron, you got quite 16 excited about your own product offering. 17 Was that just not working at all in 18 the market, or was this just an opportunity that 19 was too good to miss? 20 The second question was on the tax 21 loss carry-forwards. 22 Peter, are you able to give us a 23 present value for that? 24 And then, finally, you mentioned 31 1 about the entry point to spine from this product 2 line. 3 Are you looking at ways of leveraging 4 off Exogen product lines to go into spine and, 5 if so, have you started doing the clinical 6 trials in that area? 7 MR. O'DONNELL: Okay. Ron? 8 MR. SPARKS: Yeah, I think that, Jeremy, as 9 far as the -- our current product offering and 10 the ORATEC product offering, I think what you 11 have to look at there is we are still very 12 excited about our radio frequency energy product 13 line for all the reasons that we said before -- 14 hand control, tip design -- and that has been in 15 the face plate that allows people to use a 16 standard generator in order to do that, use 17 radio frequency, so all that continues. 18 What you have to understand is when 19 you buy a company like ORATEC, you're able to 20 combine that technology along with their 21 capsulorraphy along with certainly work in the 22 spine, so that that portfolio all of a sudden 23 becomes far broader really than any other 24 competitor in the marketplace. And that's 32 1 really what this is about. 2 So I would say that I would classify 3 it as an opportunity that was certainly too good 4 to miss and that's the reason why we approached 5 it that way. 6 I think that the only other thing 7 that I might add to that, Jeremy, as you well 8 know, in the radio frequency energy area, our 9 ability to combine radio frequency with rotary 10 mechanical cutting is very strong. 11 And I think you may be at the show 12 now, so I would invite you to take a look our 13 ElectroBlade product which does exactly that. 14 So why is that important as it 15 relates to ORATEC? Well, you're going to need a 16 generator to run that. You can use a standard 17 generator, or you can use the ORATEC generator 18 in the future. 19 And, again, that's some of the 20 strength that this particular acquisition brings 21 to us. 22 The question about spine and Exogen, 23 we are definitely using and exploring uses of 24 the Exogen technology in other areas. I would 33 1 say that spine is not one today that's on the 2 list, but certainly something that we are 3 looking at very hard. 4 MR. GREEN: Okay. 5 MR. HOOLEY: And, Jeremy, you asked about 6 the MPV, the tax losses. 7 The tax losses are roughly 5 million 8 for four years, so you're talking about 18 9 million. 10 MR. GREEN: Thanks a lot. 11 MR. O'DONNELL: Just a follow up to that, I 12 think we are very encouraged by the start we 13 made in the radio frequency market with our own 14 developments, but the opportunity to take a -- 15 to gain a significant share right now of the 16 arthroscopy RF market along with the technology 17 base of ORATEC was a very compelling argument. 18 And as Ron said, this is going to 19 enable us to drive the whole market with the 20 combination of technologies, not just within RF, 21 but also the combination with our rotary 22 mechanical cutting systems, which we are now 23 starting to put together, which goes along with 24 the Digital OR program of combining functions to 34 1 make the operating room much clean, simpler to 2 operate in, and safer to operate in, too, a big 3 thrust going forward into the future, both for 4 the patients and the surgeons; and then the 5 enabling capabilities of either single-point 6 control or voice control of the whole systems. 7 So there is very much a systems 8 integrated benefit at the back of all of this, 9 but it will take time to work that through. 10 MR. GREEN: Chris, is it possible to ask a 11 supplementary to that? 12 MR. O'DONNELL: Sure. 13 MR. GREEN: Are there any legal issues 14 outside on ORATEC? 15 I apologize. I don't have access to 16 the web here in the hotel. 17 MR. O'DONNELL: We have obviously reviewed 18 all that in due diligence. There are a couple 19 of legal items, and in our view they're 20 manageable. 21 We for obvious reasons can't comment 22 further than that. 23 MR. GREEN: They're legal issues where 24 ORATEC is being pursued by somebody else or 35 1 ORATEC is pursuing somebody? 2 MR. O'DONNELL: There are both categories, 3 as you'd expect in a U.S. company, quite 4 frankly, so we have taken a good look at them in 5 due diligence and we think they are manageable. 6 MR. GREEN: Okay. Thanks a lot. 7 THE MODERATOR: We now have a question from 8 Mr. Martin Hall from HSBC. 9 Please proceed, sir. 10 MR. HALL: Chris, I've got two follow-up 11 questions. One is more of an observation. 12 Hindsight is obviously a wonderful 13 thing, but do you now regret selling off 14 previously your former spinal business or do you 15 think that that business was very much a 16 completely different business to what you're 17 trying to achieve now? 18 And, secondly, while I appreciate 19 that you're not going to give -- go into detail 20 on the restructuring costs of $12 million, the 21 answers about great strategic fit and the 22 ability to rapidly absorb a company of this size 23 are inconsistent with the size of those costs. 24 Therefore, given the focus on 36 1 accounting issues today in the market, I think 2 this issue will need to be addressed as soon as 3 you possibly can. 4 MR. O'DONNELL: Peter? 5 MR. HOOLEY: Martin, I'm happy to address 6 that. 7 We are talking about integrating -- 8 the immediate benefit of the acquisition, one of 9 the immediate benefits, is our ability to 10 integrate a business into our business both in 11 terms of manufacturing service functions and 12 particularly the strength of our distribution. 13 We are trying to give a sensible 14 indication to the market that we see that the 15 first benefit coming through is $11 million. 16 You have to respect Ron's wish that 17 we need to speak with the people first; but if 18 you just compare $11 million benefit with 19 basically the $12 million integration costs, 20 that's basically a one-for-one ratio, which is 21 the sort of ratios that you would expect in this 22 sort of circumstance. 23 As you know, there is complete 24 transparency in the U.K. GAAP as to how 37 1 integration costs are recorded, and we have gone 2 to considerable trouble over the last couple of 3 years to make it hugely transparent what we are 4 trying to do, starting with the manufacturing 5 rationalization program, the integration costs 6 to do with the divestment, and the integrations 7 cost to do with acquisitions. 8 And it's obviously not sort -- it's 9 not easy for me to do it over the phone, but I'm 10 quite happy to go through with anybody the 11 schedule of integration costs as they have been 12 announced to the market and as they have been 13 accounted for in the books, because they are 14 slightly different because the accounting rules 15 cause you to time these things on a sort of 16 crystallized basis and the cash. 17 I'm quite happy to do that if anybody 18 wants to go to that much detail. 19 MR. O'DONNELL: Okay. There's an offer you 20 can't refuse, Martin. 21 MR. HALL: I'll definitely take you up on 22 that, Pete. I better do some homework first, 23 though. 24 MR. O'DONNELL: With regard to the 38 1 previous spinal business, first of all, this was 2 essentially an orthopedic implant business. It 3 was not well positioned in the marketplace, and 4 we made the decision to divest it to allow our 5 orthopedic business to focus on its joints and 6 trammer activities. 7 We have seen the benefit of the high 8 level of R&D and marketing focus that we have 9 then put into those businesses within our 10 orthopedic business, which grew at 18 percent 11 last year. 12 What we have said to the market 13 consistently is we did not think we would 14 participate in that direct spinal implant market 15 in the existing product platform. The share is 16 too concentrated among the top players. 17 If there was a chance of buying one 18 of the top players, we might look at it; but 19 realistically none of those players are for sale 20 or likely to be. 21 So what we have said, however -- and 22 we have done a very, very systematic review of 23 the technologies that we believe will be the 24 important players in tomorrow's spinal market, 39 1 and we have said we would look at those. 2 We have done such an exhaustive look 3 over a long period of time, and we have 4 concluded that the most attractive player in the 5 fast growing minimally invasive sector is, in 6 fact, ORATEC. 7 There was also an excellent fit with 8 our arthroscopy business, and that, therefore, 9 encouraged us to get into discussions with 10 ORATEC and conclude this transaction. 11 So we don't actually regret that. We 12 think it was a needed step for our business, and 13 we expect to build a significant business going 14 forward on a minimally invasive basis. 15 MR. HALL: Okay. Thanks very much indeed. 16 THE MODERATOR: We now have a question from 17 Mr. Alex Evans of Deutsche Bank. 18 Please proceed, sir. 19 MR. EVANS: Thanks. Just one more 20 question. 21 I was just wondering how 22 operationally geared ORATEC is, because you're 23 producing I think $48 million in sales you said 24 and sort of a minimum amount of profit 40 1 currently. You're forecasting double digit 2 sales growth. 3 How much of that is going to fall 4 through to the bottom line going forward, or is 5 there still sort of a fair amount of incremental 6 investments to go into this business? 7 MR. O'DONNELL: I guess I'll turn this 8 over to Peter, but what you are essentially 9 asking is do we need to put incremental 10 investment. 11 We will continue to invest in R&D and 12 sales development quite clearly to generate 13 those additional -- the forward growth program. 14 There is an investment which will continue and 15 be strengthened in clinical trials. 16 If that's the drift of your 17 question -- 18 MR. EVANS: I'm just wondering basically 19 over the next couple of years really whether we 20 are going to see -- excluding the integration 21 benefits coming through, is there going to be a 22 pickup in profitability, or is that sort of 23 something that's going to happen in three or 24 four years? 41 1 MR. HOOLEY: The quick answer to that is 2 yes. These products have a good gross margin. 3 I'm not prepared to give out what their gross 4 margin is, but they are a technology-driven 5 gross margin. 6 As Ron says, we will be able to 7 leverage our SG&A base, which is something that 8 they have struggled with. I mean, I think it's 9 fairly obvious that one of the huge benefits of 10 what we are doing is we are basically giving the 11 company, ORATEC, access to our 400 salespeople 12 worldwide in arthroscopy. 13 That incrementally is basically going 14 to add to the group's margin and certainly is 15 going to add to Ron Sparks's margin, so you are 16 going to see above 20 percent EBIT margin coming 17 out of the business in, say, 2003. 18 MR. EVANS: Okay. 19 MR. HOOLEY: And, you know, we will still 20 be investing in R&D in that margin line, and 21 Ron's R&D level is about 7 percent. We 22 certainly see that and perhaps a bit more on 23 this particular business line. 24 So it will be a healthy business 42 1 line. It's got strong growth. We have been 2 leveraging our SG&A line and the EBIT margin 3 will be, you know, nicely more than 20 percent. 4 MR. EVANS: Thanks, Peter. 5 THE MODERATOR: We now have a follow-up 6 question from Mr. Jeremy Green of Salomon Smith 7 Barney. 8 Please proceed, sir. 9 MR. O'DONNELL: We will take this question 10 and one other, and then I think we will close. 11 MR. GREEN: Peter, could you just tie 12 today's comments in about dilution and 13 enhancement into your previous earnings 14 guidance? 15 Are you aiming to offset the dilution 16 of this from other efficiency gains in the rest 17 of the business or will you come in slightly 18 below your sort of 15 percent target for this 19 year? 20 And going forward do you intend to 21 beat the 15 percent target, or are you just sort 22 of trying to make that a more sustainable model 23 with this enhancement? 24 MR. HOOLEY: Okay. Well, basically we have 43 1 already said mid-teams. We are looking at 2002. 2 We are giving a strong indication there that the 3 EBIT is going to basically dilute by about 1 4 percent, the EBIT line. 5 In 2003, it will basically sort of 6 break even or just become accretive, and I 7 certainly see 2004/5 that it will become 8 accretive. It could well become accretive to 9 the extent that it benefits group growth by 10 about 1 percent, but that's sort of taken in 11 isolation. 12 I think you can sort of interpret 13 that to say that it basically builds or is a 14 further foundation in the momentum motor of 15 Smith & Nephew being able to drive the EPS 16 mid-teams. 17 We have always talked about a 18 three-year window and another three-year window, 19 and I think you can see when it is doing this 20 that there is a motor beyond, let's call it, 21 this three-year window. 22 MR. GREEN: Thank you very much. 23 THE MODERATOR: Gentlemen, there are no 24 further question at this time. I'd now like to 44 1 turn the conference back to you. 2 Please continue with your 3 presentation or closing remarks. 4 MR. O'DONNELL: Okay. Well, thank you all 5 for your time and particularly those arriving in 6 the early -- very early morning to attend. 7 And thank you, Ron, for leaping out 8 of bed so soon after closing the deal, and now 9 you can go back to bed for a short while. 10 MR. SPARKS: I'm looking forward to that, 11 Chris. Thank you. 12 MR. O'DONNELL: Very well done to Ron. 13 Thank you all for your time and patience. 14 THE MODERATOR: Ladies and gentlemen, that 15 concludes the conference call for today. Thank 16 you for your participation, and we ask that you 17 please disconnect your lines. 18 (Conference call concluded.) 19 20 21 22 23 24 45 1 STATE OF ILLINOIS ) 2 ) SS: 3 COUNTY OF DU PAGE ) 4 I, SHARYN A. EVERMAN, a Certified 5 Shorthand Reporter of the State of Illinois, do 6 hereby certify that I transcribed the 7 proceedings had at the videoconference 8 aforesaid, and that the foregoing is a true, 9 complete and correct transcript of the 10 proceedings of said videoconference transcribed 11 under my personal direction. 12 IN WITNESS WHEREOF, I do hereunto set 13 my hand at Chicago, Illinois, this 15th day of 14 February, 2002. 15 16 17 Certified Shorthand Reporter 18 19 C.S.R. Certificate No. 84-2315. 20 21 22 23 24 -----END PRIVACY-ENHANCED MESSAGE-----