Smith & Nephew Expects Better Performance In 2017
By Jof Enriquez,
Follow me on Twitter @jofenriq
Smith & Nephew (S&N), the British manufacturer of replacement knee joints and medical devices, will rebound from a mixed performance in 2016 to a successful 2017 on the strength of a strong pipeline of products, as well as the positive effects of the reorganization strategy it started five years ago.
The company reported a 7 percent drop in 2016 full-year trading profit due to weak sales in China, compounded by distributors destocking there, as well as persistent and "very difficult" trading conditions in Gulf States reeling from global oil price cuts, according to Reuters. Analysts had expected profit of $1.04 billion and revenue of $4.69 billion for the full year, but S&N's numbers were less than expected, with profit of $1.02 billion and revenue of $4.67 billion.
Things are on the upswing, though, as China returned to growth in the second half of 2016. S&N says positive momentum will carry over into this year, and the company expects underlying revenue to climb 3-4 percent in 2017, based on the roll-out of new products and restructuring efficiencies.
S&N had been focusing on faster-growing emerging markets due to stiff competition in the U.S. and European markets, where S&N posted flat growth in the fourth quarter. In contrast, growth in emerging markets, excluding the Gulf States, has been 10 percent, with China growing in the high single-digits for the preceding period, despite the destocking issue.
Speaking to analysts in a conference call, CEO Olivier Jean Bohuon said he had underestimated the impact his five-year restructuring efforts would have on S&N's performance, but added that he has successfully transformed the company to assume a position of long-term growth.
"I trust that Smith & Nephew will be successful in 2017. There is no doubt about these products, organization, pricing management, sales force excellence," said Bohuon, who remained in his post despite a cancer diagnosis last year. "I'm delighted to be back full time also in the driving seat, and I'm very optimistic about the future for me and for the company."
He has good reason to be upbeat, as many of S&N's product franchises performed strongly in the past year.
"Why do we believe that 2017 will be a good year for Smith & Nephew," said Bohuon. "Obviously, the product are number one in the list."
Sports Medicine Joint Repair grew 8 percent, while Advanced Wound Devices rose more than 2 percent, continuing the positive trend for PICO, their disposable negative pressure wound therapy device. The Reconstruction business grew at 2 percent, led by Knees at plus 4 percent, which was in turn driven by the JOURNEY portfolio of partial and total knee replacements. JOURNEY II, S&N's kinematic knee, enjoyed increased uptake in a number of emerging markets. ANTHEM, the company's Total Knee System, also launched successfully.
S&N says it will expand the NAVIO surgical robotics system, part of the Blue Belt acquisition completed last year. The platform delivered growth in excess of 50 percent, as projected.
"We also have had the approval of the Total Knee, and you remember that we have started the year with Uni Knee only, and the Total Knee business obviously opens us a much bigger market than the Uni Knee," said Bohuon, according to a Seeking Alpha transcript of the call.
Relative to these products, however, the roll-out of the company's Syncera line of low-cost artificial hips and joints has been a "slow-go," said Bohuon. Underlying reasons include price pressure from competing programs from Stryker, Medtronic, and J&J, as well as the uncertainty surrounding the bundled payment approach in the Comprehensive Care for Joint Replacement (CJR) Model with new leadership at Health and Human Services (HHS) department.
Finally, S&N executives do not expect the company to be impacted much with a proposed repeal-and-replace outcome for the Affordable Care Act.