Smith and Nephew Quarterly Results: Efficiency Improvements in Orthopaedics Group are Key

Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, has announced its results for the third quarter ended 1 October 2011.

Reading the report in detail one gets the sense that the company is weathering the adverse market conditions pretty well in general, with a few fairly obvious alarm bells having been recognised by management.

We are taking the steps necessary to reduce a cost base in Orthopaedics that is too high for on-going market conditions.

The company divides itself operationally and for reporting purposes into Orthopaedics, Endoscopy and Wound Management.

Orthopaedics is perhaps unsurprisingly causing the greatest concerns, Orthopaedic products being among the larger budgetary items for hospitals and as such an area that receives greatest scrutiny and with it downward pricing pressure (like for like selling prices showing a 3% year on year reduction).  Smith and Nephew’s response to current market adversity across all divisions has been to concentrate on a combination of new product introduction, sales growth and “efficiency” and as Orthopaedics appears to have lagged the others especially on the efficiency front it is now playing catch-up by being brought under a new Orthopaedics and Endoscopy Management team.

From a revenue perspective too Orthopaedics, specifically the big-hitting joint and trauma businesses appear to be  S&Ns biggest concern at the present time with sales revenue growth generally lower than the other two divisions.  Within Orthopaedics, again perhaps unsurprisingly, the hip sector is under most pressure, with revenues slipping by 2% globally.  The report states that; “This was despite the continuing strong data on the BIRMINGHAM HIP Resurfacing System (BHR), where recent registry data in Australia and NICE data in the UK demonstrated industry-leading high long-term survivability. In traditional hips we saw double-digit growth in revenues from products featuring our proprietary OXINIUM bearing surface.”

Contrastingly, Knees, Trauma and Clinical Therapies (Exogen ultrasound bone-healing system) all showed solid growth (6%, 4% and 7% respectively)

Endoscopy, which includes the Sports Medicine business as well as Visualisation products, showed growth of  7% overall, although Visualisation, once a cornerstone of the division showed  a slight decline and now only accounts for less than 10% of division revenues.  Growth is largely attributed to new products such as the company’s Bioraptor curved suture anchors and Dyonics Platinum shaver blade range.

Both Orthopaedics and Endoscopy showed greater growth rates outside US, in contrast to Advanced Wound management which grew at 7% in US and 5% OUS, with European markets described as “weak”.  Negative Pressure Wound Therapy reportedly had “a strong quarter” with good news on reimbursement and new product introductions in several markets.  The company reports launch of eleven new products in its Exudate Management portfolio.

So, returning to the subject of efficiency savings, does it look like bad news for employees?  It’s not even reading between the lines to conclude that “action plans targeting $150M per annum” will have some impact and indeed elsewhere the company has acknowledged that it is likely to make job cuts in order to restore its margins, although it also states that it was too early to say where they would be or how many staff would be affected.  “Much tighter controls on spending” clearly suggests cutting back, most notably in Orthopaedics, and potentially including its Hull, UK based facility. The company’s stated ambition is to show trading profit of 24% in Q4, compared with 19.8% in Q3, which would require a reversal of the recent downward trend. The company remains bullish that its raft of new initiatives will deliver.

This is only our interpretation and a snapshot of the full report which can be found here.

Source: Smith and Nephew, medlatest staff