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Smith & Nephew Report Lower-Than-Expected Gain

Posted on: Saturday, 29 April 2006, 00:00 CDT

By Rob Robertson, The Commercial Appeal, Memphis, Tenn.

Apr. 28--Citing a soft market, Smith & Nephew officials Thursday reported a lower-than-expected revenue gain of 6 percent for the first quarter of 2006.

The medical device manufacturer reported first-quarter revenues of $643 million, up from $628 million in the same quarter last year, but down from the prior quarter's revenue total of $670 million -- a 4 percent decline quarter-to-quarter.

The company's Memphis-based orthopedics operation, which employs about 1,650 people, split into two units earlier this year. That restructuring into separate Reconstruction and Trauma divisions slowed growth to an 5 percent clip in the first quarter to $329 million combined.

Smith & Nephew had warned that tougher market conditions could produce slower growth this year when it released its year-end earnings report for 2005.

And analysts have been forecasting a shaky orthopedics market for the rest of the year, especially in light of proposed cuts to Medicare reimbursement for surgical procedures.

So far those predictions have proved accurate, and only "modest\rdblquote improvement is expected for the second quarter, said Smith & Nephew CEO Sir Christopher O'Donnell.

Raj Denhoy, senior analyst at Piper Jaffray, said the company's effort to soften the blow probably didn't do much good.

"These results were clearly not good," Denhoy said. "The company did warn about this, but when it actually happens, investors are going to get concerned.

"Growth fell toward the market rates when they have been beating the market for some time."

Across the Atlantic, business was also adversely affected by health care budget constraints in the UK and Germany, the company said.

In response, the company was renewing cost-control efforts and focusing investment behind its new products.

"With one of the strongest new product launch programs we have had for many years, we remain confident in our medium and long-term growth prospects," O'Donnell said.

The company expects to benefit in the second half from new product launches such as a less invasive hip implant.

Still, for many investors looking at an orthopedics market that is decelerating across the board, the question is how meaningful those new product launches will be.

"We're in a trough between product cycles," Denhoy said. "They do have some pretty prime products in the pipeline, but there are concerns about how effective those new products will be short-term."

Investors today are less likely to give companies the benefit of the doubt, Denhoy said.

"Nobody wants to touch these stocks right now," he said.

Shares of Smith & Nephew fell $4.27, or 9.4 percent, to close at $41.21 on the New York Stock Exchange. The company's U.S. shares have traded between $40.10 and $52.80 over the past 52 weeks.

The soft market put pressure on Smith & Nephew's competitors as well.

Warsaw, Ind.-based Zimmer Holdings Inc. shares closed down $3.99, or 5.5 percent, to $62.11, on the New York Stock Exchange after forecasting earnings for the next two quarters that fell below estimates from analysts surveyed by Thomson Financial.

The stock has traded between $60.19 and $85.10 over the past 52 weeks.

On Wednesday Zimmer reported a profit 82 cents per share on sales of $860.4 million, compared with analysts' estimates of 81 cents on sales of $875.1 million.

On April 20, Kalamazoo, Mich.-based Stryker Corp. reported adjusted first-quarter earnings of 49 cents per share on sales of $1.32 billion, compared with Street estimates of 48 cents per share on revenue of $1.33 billion.

Shares of Stryker slipped 59 cents, to close at $44.15 on the NYSE.

One of the orthopedic companies least affected was Warsaw, Ind.-based Biomet Inc., whose shares fell 35 cents to close at $36.96 on the Nasdaq.

SMITH & NEPHEW EARNINGS:

2005 revenues: $2.46 billion

2006 first quarter revenues: $643 million

2005 first quarter revenues: $628 million

First quarter revenues, Orthopedics:

Reconstruction: $221 million

Trauma/Clinical Therapies: $108 million

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Copyright (c) 2006, The Commercial Appeal, Memphis, Tenn.

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SNN, ZMH, SYK,

Source: The Commercial Appeal

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