Medical tech company’s shares plunge on profit warning

Surgical Innovations saw its shares dive after it warned that its adjusted annual profit will fall below the prior year after disappointing trading in the second quarter.

The company’s stock was trading 37% lower in early trade on Friday at 2.60 pence each after the warning on profits which it blamed on a challenging regulatory approval process acting as a “formidable barrier” for prospective products and a disruption to order patterns caused by Brexit uncertainty. The company’s share price later closed at 2.90 pence per share.

The designer and manufacturer of medical equipment for key hole surgery, listed on the AIM, said that following the strong final quarter of 2018, trading in the first quarter ended 31 March 2019 was in line with the board’s expectations and showed modest growth in revenues compared with the equivalent period last year.

But it said this momentum has not carried into the second quarter, with orders in the UK and EU markets lower than expected.

Broker N+1 Singer adjusted its forecasts in light of the announcement.

“We forecast revenue (YoY growth) of £12.1m (10.0%), £13.8m (13.9%) and £15.2m (10.4%), and an adjusted profit before tax of £1.1m (-23.4%), £1.8m (66.7%) and £2.3m (24.6%) in FY’19, FY’20 and FY’21, respectively. We continue to forecast positive cash generation of £1.1m, £1.4m and £1.8m, respectively,” it said.

Surgical Innovations said: “The disruption to order patterns by distributors and end users caused by Brexit uncertainties has made visibility of true demand more difficult than normal, and it is anticipated that this volatility is likely to continue until matters are resolved,” the company said.

However, the Leeds-based company said revenues in export markets elsewhere remain unaffected, especially the US where growth has been strong.

The company said that demand in the UK market more generally continues to be muted by the level of activity in the NHS.

“Whilst our UK distribution business continues to have success in winning new accounts in the NHS, the overall volume of UK activity is a continuing concern, especially in the current political climate,” said Surgical Innovations.

Meanwhile, the business said that sales of one of its key distribution product ranges, Cellis, have been slower to ramp up than expected following renewed regulatory approval being received in September 2018.

The company said that regulatory approvals are becoming increasingly challenging to achieve and provide a “formidable barrier” to prospective new entrants.

“Delays in the regulatory approval process are symptomatic of the severe contraction in the number of approved regulatory bodies in Europe,” the company said.

“Taking these factors into account, the board considers that growth in revenues in the second half of the year is unlikely to fully counter the relatively weaker second quarter to date. Full year expectations for revenue will exceed those of the prior year by a more modest rate of growth than previously anticipated.

“Whilst margins are expected to remain in line, overheads will reflect the investment in additional resources devoted to operational and regulatory matters. Accordingly, adjusted profit before tax is expected to be below the level achieved in 2018. The group currently holds net cash and continues to be cash generative.

“The directors recognise that the impact of the above external market factors on the group is disappointing; however, as significant shareholders in the group we continue to look to the future with confidence.”