(Adds detail, executive and analyst comment.)
By Jason Douglas
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- U.K. orthopedics firm Smith & Nephew PLC (SN.LN) Friday said U.S. sales of its replacement hips and knees lagged the market during the third quarter, but reported a 73% rise in net profit as an ongoing drive to boost margins paid off.
U.S. sales of London-based Smith & Nephew's hips and knees grew about one percentage point behind a broader market growth rate of 5% during the three months to the end of September, Chief Executive Officer David Illingworth told reporters.
Its orthopedic franchise previously outpaced the market in revenue growth, thanks to the popularity of its Journey knee and Birmingham Hip Resurfacing system, or BHR, which are designed for young and active patients.
But the recession weighed harder on younger candidates for surgery than retirees. With jobs to go to, many were reluctant to take the time off work or balked at the high cost and so procedures in the roughly $11 billion a year market were deferred.
Smith & Nephew, which gets about half of its total revenue from the U.S., Friday said the market is stabilizing as economic worries recede, echoing U.S. rivals Zimmer Holdings Inc. (ZMH), Johnson & Johnson (JNJ) and Stryker Corp. (SYK), who all signalled a slight improvement in growth rates of sales of hips and knees during the third quarter.
But 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.
He added that sales of older products are outpacing the market, however. Smith & Nephew isn't sure yet whether this means doctors are substituting a BHR or Journey for a less expensive product, he said.
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 0922 GMT, shares in Smith & Nephew were down 3.5 pence or 0.7% at 536.5 pence, underperforming a 0.1% 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