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Product / Company Performance

Smith & Nephew Reports 4Q18 Orthopedic Revenue of $911.8MM, +1.4% vs. 4Q17 -

By Mike Evers, ORTHOWORLD

Smith & Nephew posted 4Q18 orthopedic revenue of USD $911.8MM, +1.4% vs. 4Q17, with 2018 full year revenue of $3,456.6MM, +3.1% vs. 2017. Results for the quarter were driven by solid performance in the U.S., where the company does just over half of its business, as well strong sales in the emerging markets of China and Latin America. European markets continued to face challenges, especially Germany, where the company recently appointed new leadership.

Guidance for 2019, inclusive of all franchises and revenue, is reported growth in the range of 1.8% to 2.8%.

Results for the knee franchise were driven by double-digit growth of JOURNEY II, ANTHEM and LEGION revision. The company hit a milestone of $1 billion in annual sales for knee implants in 2018 (note, our knee segment combines their implants with NAVIO). While the company does not share much specific data about NAVIO, leadership noted that they doubled unit sales in 2018 and it is “a very relevant part of the overall robotic placements and units in the world today.” As noted at the J.P. Morgan Healthcare Conference, while NAVIO is presently focused on knee, the base technology is scalable into procedures like sports medicine and hip. Expect an update in early 2019, beginning with AAOS.

Smith & Nephew sees itself as a consistent number two behind Stryker in knees and acknowledges that robotics are a part of Stryker’s success in that segment. It is clear, however, that its workforce has significant ground to cover in terms of robotics expertise. CEO Namal Nawana said, “It’s an important part, not just in knee replacement, but more broadly in surgery. We still have some improvements to make on how we operate and how we serve our customers, and I expect our teams to lift in that area, as well as gaining their understanding of how robotics can help their customers. That takes time, and we’ve only been playing with the toys for a little bit of time.”

The company grew its hip franchise above market average growth (4% before foreign currency exchange impact), driven by increased focus by the commercial teams on POLAR3 and REDAPT Revision system. Leadership expressed excitement about the product pipeline in this segment, including a dual mobility product with OXINIUM bearing surfaces that protects against dislocation without compromising range of motion.

Trauma grew in the U.S. driven by INTERTAN nails and EVOS plates. In 2019, the company will launch EVOS SMALL in additional countries to bolster trauma sales, now that the product is fully launched in the U.S. Despite mostly flat sales in the segment, leadership remains confident in their trauma portfolio. Mr. Nawana pointed to the lack of scale in international markets that kept Smith & Nephew business leaders from effectively focusing on trauma. With the newly-implemented franchise model announced in 4Q, leadership believes that their trauma business will soon turn the corner.

The joint repair side of Sports Medicine was a growth driver, with REGENETEN rotator cuff repair revenue more than doubling for the full year. The growth in sports medicine was offset by a decline in enabling technologies. The company believes that its 2019 product pipeline is a key factor in turning this segment around. The FLOW90 Wand has launched in some international markets and is scheduled for a 2Q19 U.S. launch. The second quarter will also see the launch of PLATINUM resection wands, a workhorse in the company’s sports medicine business. LENS visualization is expected within the year, and REGENTEN is entering ex-U.S. launch this year, as well. In December 2018, Smith & Nephew acquired Ceterix and its meniscal tear repair product, NovoSitch Pro. Manufacturing scale-up is underway, and the company is in the process of rolling out NovoStitch Pro first in the U.S., and then to other geographies.

Smith & Nephew also announced their “Strategic Imperatives” for 2019 and beyond that include achieving full potential of the portfolio (including more engagement with U.S. ASCs), transforming the business through enabling technologies, expanding into high-growth segments, strengthening company talent and expanding margins.

As demonstrated by the purchase of Ceterix, Smith & Nephew is actively searching for acquisitions in high-growth areas of the industry. Leadership noted that the company currently operates in a $40 billion market, while medical devices overall is a $400 billion market, creating ample opportunities to find value and growth.

As of February 2019, it was widely speculated that Smith & Nephew was engaged in talks to acquire NuVasive in a $3 billion deal. From our perspective, jumping into spine would not meet Smith & Nephew’s interest in acquisitions that allow them to enter faster-growing markets.

ORTHOWORLD estimates segment growth on an as-reported basis as follows:

  4Q18 4Q17 $ Change % Change
Joint Replacement $454.1 $445.3 $8.8 2.0%
Knees $279.8 $274.3 $5.4 2.0%
Hips $160.0 $157.0 $3.0 1.9%
Extremities $14.3 $14.0 $0.3 2.5%
Trauma $112.7 $114.0 -$1.3 -1.2%
Sports Medicine $345.0 $340.0 $5.0 1.5%
Total  $911.8 $899.3 $12.4 1.4%
  FY18 FY17 $ Change % Change
Joint Replacement $1,721.4 $1,669.4 $52.1 3.1%
Knees $1,054.3 $1,016.4 $37.9 3.7%
Hips $613.0 $599.0 $14.0 2.3%
Extremities $54.1 $54.0 $0.1 0.2%
Trauma $438.2 $441.0 -$2.9 -0.7%
Sports Medicine $1,297.0 $1,243.0 $54.0 4.3%
Total  $3,456.6 $3,353.4 $103.2 3.1%

ORTHOWORLD estimates sales by geographic region as follows:

Geographic Region 4Q18 4Q17 $ Change % Change
US $457.3 $439.1 $18.2 4.1%
Ex-US $454.5 $460.2 -$5.7 -1.2%
Total  $911.8 $899.3 $12.4 1.4%

Year end 2018 net earnings, inclusive of all revenue, is as follows:

FY18 Amount ($MM) % of Sales
Sales $4,904.0  
   Cost of Sales -$1,298.0 26.5%
   R & D -$246.0 5.0%
   Selling and Admin -$2,497.0 50.9%
   Other -$200.0 4.1%
Net Earnings  $663.0 13.5%

 

Sources: Smith & Nephew; ORTHOWORLD estimates.

Mike Evers is ORTHOWORLD’s Market Analyst. He can be reached by email.

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