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The medical devices manufacturer plans to launch exciting products and boost pricing power
Thursday 22 Jun 2017 Author: Lisa-Marie Janes

The future looks exciting for Smith & Nephew (SN.) with several products in its pipeline and plans to drive growth through emerging markets and acquisitions.

In 2016, Smith & Nephew had a tough year as there was a slowdown in government spending in China and too much stock to shift.

Weak oil prices also made trading difficult in the Gulf States.

The history

Smith & Nephew started out as a pharmaceutical business founded by Thomas James Smith and his nephew Horatio Nelson Smith.

The partnership developed a method for refining cod liver oil, but it wasn’t until the outbreak of World War I that the firm found its true path when it supplied field dressings to the French army.

Smith & Nephew now develops wound management products and devices, hip and knee implants, advanced wound devices and technology for keyhole surgery.

It sells its products directly and through distributors to healthcare procurement groups, patients, surgeons, physicians and hospitals.

What does Smith & Nephew Focus on?

One of the medical equipment manufacturer’s strongest areas is its wound management division, currently holding the second highest global market share (circa 14% to 18%) behind private medical device firm Acelity.

Its UK competitor ConvaTec (CTEC) holds an estimated 5% to 9% of the global market.

Smith & Nephew specialises in dressings that treat acute and chronic wounds such as burns and post-operative wounds. Its PICO wound therapy device creates a vacuum over a wound to remove pus to reduce the risk of an infection.

PICO is around the size of a phone so it can be carried around discreetly, is easy to apply and use. The device can be used in various healthcare settings and frees up time for busy nurses – a priority as the NHS is struggling with budget cuts.

Hip and knee implants are another important division of Smith & Nephew. The implants are made using its Oxinium technology which is very strong, creating a surface that is 4,900 times more wear-resistant than cobalt chrome. The technology is combined with highly cross-linked polyethylene to make the implants even more durable.

Smith & Nephew’s fastest growing division is sports medicine with a global market share of 20% to 24%. The market leader is private medical device company Arthrex, which holds approximately a third of the market.

Smith & Nephew’s sports medicine division sells instrumentation such as sutures and fluid management systems to help surgeons perform surgery for sports-related injuries.

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Intriguing produce pipeline

Over the summer, the Smith & Nephew will launch Journey II XR, a device that provides more mobility after a whole knee is replaced.

The company will also launch the highly anticipated NAVIO robotic surgical system for total knee replacement this quarter, which is around 80% of the market. NAVIO already offers robotics assistance in partial knee replacement surgery.

Over the last year, Smith & Nephew launched its Werewolf coblation technology that removes tissues in the knee with minimal damage to untargeted tissue.

This isn’t the only area that Smith & Nephew aims to make life easier for healthcare professionals. Last year, it launched the LENS surgical imaging system comprising a console, camera head and iPad app to capture pictures and provide limited control of the camera within articular cavities.

Driving growth through emerging markets

In a bid to stimulate a 3% to 4% underlying sales growth rate in 2017, the company is restructuring the business by cutting the number of managing directors, driving better pricing and launching new products.

Historically, Smith & Nephew has managed to grow at a rate of between 2% and 4%.

The company also wants to improve sales of its wound dressings by showing the value of its premium-priced products, which helps get people out of hospital faster.

It appears this strategy is paying off as Smith & Nephew reported a return to double-digit growth in emerging markets with China growing by 14% in the first quarter of 2017.

There also appear to be positive signs for the Gulf States with trauma and extremities-related product sales up by 5%.

Is Smith & Nephew's growth target achievable?

For Edison analyst Linda Pomeroy, emerging markets are important in helping Smith & Nephew hit its sales growth target so improved trading in this division is reassuring.

Advanced wound devices are one of the key revenue drivers for the company, although Pomeroy highlights 5% growth in trauma and extremities during the first quarter of 2017 as ‘significant.’

Last year, the trauma and extremities business was ‘one of the worst performers’ as weakness in China, the UK and Germany weighed on sales.

While the analyst is confident about improving sales and profit margins through its product pipeline, Pomeroy flags currency movements and pricing as potential headwinds.

Some brokers are more negative, with Citi analyst Patrick Wood recently initiating coverage on the stock with a ‘sell’ recommendation.

While Wood concedes that Smith & Nephew dealt with price pressures well, he is ‘perplexed’ at consensus expectations of an earnings per share growth of 8% to 10% from 2018 onwards.

He flags a key risk from medical technology outfit Medtronic’s entry into the hip and knee market, which could hit Smith & Nephew’s annual earnings by between 2% and 3% as it would have to cut prices to compete.

In our opinion, the company is heading in the right direction with a strong turnaround strategy. Buy at £13.35.

 

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