Medtech Smith & Nephew warns of cutbacks after modest growth
MEDICAL technology group Smith & Nephew, whose UK orthopaedics operation is based at Warwick Technology Park, has warned that modest growth and continuing pricing pressures in established markets will necessitate a lowering of its orthopaedics cost base.
The US firm has announced a 10% rise in third quarter revenue to £647m ($1,032m) with strong performances in its endoscopy and advanced wound management divisions.
However, despite the increase in revenue, trading profit in the three months to October slipped to £128m ($205m) (2010: $215m) – and 9% decline on an underlying basis and the poor performance of the orthopaedics division has been blamed.
Trading margins for the division were 15.6% (2010: 22.2%) and the decline has been blamed on three principal factors.
First, it said the group continued to experience pressure on the gross margin from the sales mix, a trend seen in the first half of the year. Top line growth was driven by products and geographies where it achieved lower margins, reducing the gross profit margin by about 200 basis points.
Second, orthopaedics experienced an unusually high level of periodic costs – legal, inventory and receivables – in the quarter, totalling about £6.27m ($10m).
“Finally, it is clear that the modest growth and continuing pricing pressures in established markets necessitate a lower orthopaedics cost base,” said the group in its Q3 statement.
“Actions were underway to address this, but these have not been adequate, resulting in a cost base which was $10m (£6.27m) too high in the quarter. The new combined orthopaedics and endoscopy management team has instigated much tighter controls over spending and we are confident that the orthopaedics margin will improve materially from Q4 onwards.”
The group also saw revenues in its global hip business slip by 2%. It said its Birmingham Hip Resurfacing System continued to see strong headwinds – this was despite continuing strong data on BHR, where recent registry data in Australia and NICE data in the UK demonstrated industry-leading high long-term survivability.
Overall, the group said its revenue guidance for 2011 was unchanged.
“We expect revenues in orthopaedic reconstruction, arthroscopy (sports medicine) and advanced wound management to grow at above the market rate. In orthopaedic trauma we expect to sustain our improved performance,” continued the statement.
It said it remained its intention to deliver a sustainable trading profit margin of around 24% per annum in the medium term.
“Although we will give formal guidance for 2012 with our full year results, our current expectation is that the efficiency improvements we achieve in 2012 will modestly exceed the effects of the investments we will make to drive growth and the effects of continued modest pricing pressure,” it added.
