Bloomberg News

Smith & Nephew Third-Quarter Profit Rises on Wound Care

November 01, 2012

Smith & Nephew Plc (SN/), Europe’s biggest maker of artificial hips and knees, had the biggest drop in quarterly sales in at least seven years amid continued health- care price pressure in Europe.

Third-quarter sales fell to $952 million from $1.03 billion a year earlier, missing the $967.2 million average estimate of 10 analysts. Revenue was also reduced by the absence of revenue from the Biologics and Clinical Therapies business, which was spun out as Bioventus LLC in May. Smith & Nephew reports earnings in dollars, and the currency’s gains reduced revenue from business outside the U.S.

Smith & Nephew is trying to cut costs and improve margins as cash-strapped governments choose cheaper implants and patients delay hip- and knee-replacement surgery because of the economic downturn. Competitor Stryker Corp. (SYK:US) cut its earnings forecast for the year on Oct. 17, saying Europe will remain challenging. The area, which accounts for 30 percent of Smith & Nephew’s revenue, deteriorated further from the previous quarter, the company said.

The Birmingham hip replacement system, which had a 36 percent decline in sales, is still in “free-fall,” which is surprising, Lisa Clive, an analyst with Sanford C. Bernstein Ltd. in London, said in an interview.

‘Notable Headwind’

“At this point it’s a niche product and it should bottom out,” she said. “I thought we would already be at that point.” The decline in sales of the system is “still a notable headwind.”

Smith & Nephew closed down 1 percent to 648.50 pence in London, giving the company a market value of 5.85 billion pounds ($9.4 billion).

Trading profit, which excludes reorganization and acquisition costs, rose to $207 million from $205 million a year earlier, the London-based company said today in a statement. Earnings excluding restructuring costs and other items totaled 16.6 cents a share, matching the average estimate of 10 analysts surveyed by Bloomberg.

While the company still expects a “modest increase” in the trading profit margin over last year’s 22.5 percent, it said it has seen a stronger-than-expected lag in its Birmingham metal-on-metal hip resurfacing business and slightly lower knee growth relative to the market. The company said previously that revenue from the sports-medicine and advanced wound-management units will expand more quickly than the market, while orthopedic reconstruction will probably grow at close to the industry rate and orthopedic trauma will lag behind.

Wound Business

Sales at the wound business during the quarter rose 4 percent in local-currency terms to $254 million while revenue from surgical devices was unchanged on that basis at $698 million, the company said.

Knee-replacement sales declined 1 percent during the quarter while hip replacement revenue was little changed excluding metal-on-metal products and down 4 percent in total, the company said. Sales from sports medicine joint repair rose 8 percent during the quarter, the company said.

Sports medicine sales rose more than expected in the U.S. due to product introductions there, Clive said.

Smith & Nephew is still scouting potential acquisitions in wound care and minimally invasive surgery, Bohuon said during a conference call today. The company would borrow money to make a big acquisition if the opportunity arises in those areas, as well as in emerging markets such as Brazil, Russia, India and China, Hennah said in August.

The company is reducing its 11,000-person workforce by 7 percent over three years to help save $150 million a year.

To contact the reporter on this story: Allison Connolly in Frankfurt at aconnolly4@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net


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