(Recasts, adds detail from analyst conference call.)
By Jason Douglas
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- Smith & Nephew PLC (SN.LN) Friday reported a 73% rise in third-quarter net profit, driven by an ongoing push to boost margins, but said it's not fully benefiting from a fledgling recovery in the U.S. market for replacement hips and knees, estimated at around $11 billion a year.
The London-based orthopedics company echoed big rivals like Zimmer Holdings Inc. (ZMH), Johnson & Johnson (JNJ) and Stryker Corp. (SYK) Friday, saying the number of operations being performed in the U.S. ticked up during the third quarter following months of sluggish growth. About half Smith & Nephew's revenue comes from the U.S.
But while the overall market for new joints grew about 5%, growth in sales of Smith & Nephew's hips and knees was one percentage point behind, Chief Executive Officer David Illingworth told reporters.
Flagship products like its Birmingham hip resurfacing system, or BHR, and Journey knee are made for young and active patients. Unlike retirees with no jobs to go to, they have been deferring procedures because they're reluctant to take time off work or have balked at the cost in cash or insurance premiums.
Those younger patients aren't yet rushing back to their surgeons. "We are making progress over the last quarter, but we continue to be disproportionately affected by younger and more active patients," Illingworth said Friday.
The company didn't give specific figures but said sales of high cost products like the BHR, which accounts for about 25% of its U.S. hip sales, were weak in the third quarter but sales of other implants outpaced the market as broader surgery rates improved.
Illingworth told analysts on a conference call Friday it is possible some surgeons are substituting a BHR for a more basic product, but the company isn't sure that's happening yet.
Smith & Nephew said Friday third quarter net profit rose to $128 million from $74 million a year earlier, on revenue down 2% at $915 million. Earnings per share, excluding restructuring, amortization and other costs, were 16.8 cents, comfortably beating analysts' forecasts of between 13 cents and 14.5 cents.
Nomura Code Securities analyst Charles Weston said the figures reflect a better-than-expected outcome from the company's earnings improvement plan, as well as a lower tax rate.
Smith & Nephew has been trimming costs by closing some big overseas offices, shutting factories and shifting production to China as part of its plan to get trading margin to 24.5% by the end of 2010. Trading margin excludes the impact of some costs like acquisitions and amortization. Friday, it said it delivered a 410 basis point improvement over the third quarter and its trading margin stood at 22.8% on Sept. 26.
The company reported a 5% annual decline in third quarter revenue at its orthopedic trauma unit, which makes products to fix broken bones. A big military order boosted the third quarter figure last year, Illingworth said. Nevertheless, he added he wasn't satisfied with the trauma unit's performance and a new head of its overall orthopedics business has been tasked with improving it.
At 1521 GMT, shares in Smith & Nephew were down 3.5 pence or 0.7% at 536.5 pence, underperforming a 0.3% higher FTSE 100 index.
Company Web site: www.smith-nephew.com
-By Jason Douglas, Dow Jones Newswires; 44-20-7842-9272; jason.douglas@dowjones.com