Smith & Nephew hit by rejection
Europe’s largest seller of orthopaedic devices saw its shares tumble to a two-year low after it abandoned producing a key leg ulcer treatment when America turned it down, but its sales are up.
Smith & Nephew has abandoned production of a key leg ulcer treatment after it failed to win approval for the American market. The firm, Europe’s largest seller of orthopaedic devices, will end production of the artificial skin product after the US Food and Drug Administration rejected it.
The shares touched a two-year low of 441.5p in early trade but rallied later in the day.
Smith & Nephew chief executive Sir Christopher O’Donnell admitted the absence of Dermagraft dented the outlook for its wound care division next year— it has also been hit by suppliers destocking and other product issues — but would be compensated for by strong growth at its orthopaedics and endoscopy units.
Group sales climbed 10 per cent to £341m in the third quarter, with sales at its orthopaedics division, which makes hip and knee replacements, up 15 per cent.
The wound care and endoscopy businesses recorded sales growth of 3 and 8 per cent respectively. Operating profit advanced 11 per cent.
O’Connell said that although growth in revenue and profits had slowed slightly over the period the orthopaedics division was growing at a “market leading rate”. Morten Herholdt, an analyst at Barclays, said the loss of Dermagraft was “disappointing.
The lack of visibility over the market growth rate is likely to weigh on the shares until new products show signs of gaining traction,” he said in a note.
The Dermagraft operation was expected to be loss-making until 2009 so Smith & Nephew said the exit would improve its growth profile. The decision will result in an impairment charge of £15.5m in the period and £25min redundancy payments in the fourth quarter.
Broker Numis said Dermagraft was a “drag” on profit margins at the wound management business, which are already the lowest of the group. “In the short-term the discontinuation was probably the right decision,” said analyst Brett Pollard in a note.
“Although sales for 2006 will be off around £14m, profits will be enhanced by £7m but the question remains what will be brought through to drive medium to longer-term growth.”
Smith & Nephew is expected to complete the sale of BSN Medical for up to £200m early next year.