Tough Times For S&N Revenues, Especially In Europe And Hips And Knees

In short

Smith & Nephew’s revenue lines were less impressive than the lower part of their income statement for the quarter as total revenues only scraped up 1% on an underlying basis to $952 million.

Background

Smith & Nephew’s revenue of $952 million for the quarter was down 8% on a reported basis, reflecting a 4% negative currency impact and a 5% effect from the loss of revenues from the old Biologics and Clinical Therapies business following the Bioventus transaction.

Trading profit in the quarter was $207 million, up 10% underlying on last year’s $205 million (while this doesn’t look like 10%, it doesn’t take account of disposals and currency adjustments).

Group trading profit margin was 21.7%, a strong performance, and 190 basis points ahead of 2011. The company says this margin improvement demonstrates the positive impact of the restructuring of Advanced Surgical Devices against the weak comparable last year.

So, from a revenue perspective, in common with other company Q3 reports, Smith & Nephew is citing challenging conditions across its established markets, particularly in Europe which it says has further deteriorated from the previous quarter.

Elsewhere around the globe the company enjoyed 2% growth in the US, a decline of 1% in other established markets and 6% growth in what the company tags Emerging and International Markets.

By division

Advanced Surgical Devices global (“ASD”)

ASD total revenue of $698 million was flat on last year on an underlying basis (excluding a -3% currency headwind and -7% impact from the Bioventus transaction).

Revenue in the US was flat, whilst other Established Markets declined by -1% and resulted from weaker market conditions, particularly in Europe. Emerging and International Markets saw a 3% increase. The company says this increase, while lower than recent quarters, mainly reflects distributor buying patterns and is against a strong comparable. China continues to grow at over 20%.

The company say its US restructuring is well advanced and programmes are fully underway in Europe, from which it says it expects to deliver further efficiency benefits in the future.

So the highlights:

  • Like-for-like price pressure across Hip and Knee Implant and Trauma franchises remained similar to previous quarters, at around -2%. Price pressure was partially offset through mix gains.
  •  Knee Implants declined of -1% against a strong comparable and an estimated market growth of 2%. This reflects both the increased weakness in the European market where the company has a proportionately larger market position, and also the fact that the new JOURNEY◊ II system is in clinical evaluation and full global market release is not expected until late next year
  • Hip Implant revenues, excluding metal-on-metal products, were flat, an improvement on the prior quarter.
  • Revenue across the whole hip franchise was down -4% including sales of the BIRMINGHAM HIP◊ Resurfacing System (“BHR”) which were down -36% compared with last year.

Sports Medicine Joint Repair

A strong quarter, especially in US. Global revenue was up 8%. Several new products are getting the credit including the ENDOBUTTON◊ CL Ultra 10mm fixation device, which goes to show that you can extend the life of even the oldest product as this family goes back twenty years. The company also obtained US FDA clearance for expanding the indications of six of its repair products, including HEALICOIL◊ PK Suture Anchor and the OSTEORAPTOR◊ Suture Anchor for use in hip arthroscopy.

Looking at the negatives, and predictably revenue in our Arthroscopic Enabling Technologies, which means capital equipment, fell by 3%, consistent with the prior quarter, as customers continued to reduce their spending on visualisation equipment.

Trauma was up 2%, which was the same as the overall estimated market growth rate of 3% after the -1% impact of expiring US royalties.

Advanced Wound Management global (“AWM”)

AWM continued to deliver strong underlying growth, with revenue growing at 4% (excluding a -6% currency impact) to $254 million (2011: $258 million), double the estimated market rate of 2%. This was another good result set against a slightly weaker market. In addition, we had a strong comparator quarter when we benefitted from the effects of the consolidation of our distributor network in Canada, which particularly impacted our Exudate and Infection Management franchises.

The main highlight was US growth of 11%, driven by a very strong performance from Negative Pressure Wound Therapy.

Outlook

It’s a mixture of headwinds and following winds as you will have picked up from the above analysis. NPWT is expected to continue to grow while hips and knees may struggle. Europe is clearly a concern for the company, given that 30% of its revenues come from there.

Having said all that, guidance for the full year is unchanged in all areas.

Company comments

Commenting, Olivier Bohuon, Chief Executive Officer of Smith & Nephew, said:

“I am pleased to report an underlying 10% increase in trading profit for the quarter to $207 million. The benefits of our efficiency improvements have helped to offset the impact of on-going tough conditions in Europe, and we continued to make good commercial progress in the emerging markets. Our Advanced Wound Management business continued to thrive, growing at twice the market rate.

“Smith & Nephew’s strategic priorities are about making choices for the long term benefit of our business, by allocating resources to the areas where we can achieve the greatest returns. I am confident that by following this strategy we are shaping the Group to respond to the market conditions and opportunities we face.”

Source: Smith & Nephew, PLC