Smith & Nephew falls short of expectations, citing COVID-19 headwinds

Dive Brief:

Sales across Smith & Nephew slumped in the second quarter, causing first-half trading profit to miss the analyst consensus by $53 million.
In results posted Wednesday, Smith & Nephew said surgery volumes rebounded throughout the quarter but, with Europe and the ear, nose and throat (ENT) unit recovering slower than other areas, COVID-19 is still impacting its major markets.
While CEO Roland Diggelmann called July a "good" month, he opted against sharing guidance in light of ongoing uncertainty about the speed and durability of the recovery.

Dive Insight:

Smith & Nephew shared an early look at the effect of the coronavirus pandemic on medtechs in May, when it revealed sales fell 47% in April as the U.S. and other key markets stopped elective procedures. Earlier this month, the company said performance improved in May and June, when sales fell 27% and 12%, respectively, but held off on sharing profit data until Wednesday's second quarter and first half 2020 results.

After stripping out exceptional and one-off items, Smith & Nephew posted a first-half profit of $172 million, compared to analyst consensus of $225 million. Shares in the company opened down 5% in early trading in London.

Despite $150 million in cost saving measures taken by the medtech, its financial performance reflects the effect of the pandemic on factors including sales and factory utilization. Smith & Nephew’s knee unit took the biggest hit, recording a 47% drop in sales, but all its businesses suffered double-digit declines.

Still, the size of the declines shrunk across the quarter, with orthopaedic sales down 10% in June compared to 58% in April. The trend reflects the return of elective procedures in the U.S., Australia, Germany, Japan and China, all of which reached more than 80% of expected levels by June. The U.K. is the one major laggard. Surgery volumes in that country are beginning to return but are still at 35% of normal.

Diggelmann told investors Wednesday he expects the recovery in Europe to be relatively slow due to “the more public nature of the healthcare systems, the condition of some systems before the crisis and differences in incentives, in particular compared to the U.S.”

Nonetheless, the CEO said the overall situation is improving, pointing to July as a “good" month. While there is still a lot of uncertainty, he contends the trend is generally positive and could accelerate in the coming quarters citing "pent-up demand."

That pent-up demand reflects the ongoing slump in activity in some of the markets served by Smith & Nephew. ENT case volumes “remain low,” Diggelmann said, amid “understandable caution” about restarting ear, nose and throat procedures. ENT sales fell 44% in the quarter.

Smith & Nephew is also contending with “slower and more cautious decision making around larger investments” by hospitals, he noted. The reticence of hospitals to make large purchases has caused the company’s consumables businesses to rebound faster than the capital components of its operation, but Diggelmann expects the impact to be temporary. Despite the disruption, Smith & Nephew made the first sales of its recently launched robotic CORI Surgical System in the quarter.

The company moved into robotics through its 2015 takeover of Blue Belt Technologies and is still “very actively” looking for additional takeover targets, Diggelmann said. COVID-19 had no effect on the focus of the search, meaning Smith & Nephew continues to look for tech to sell through its existing commercial footprint, but he acknowledged the pandemic means “there may be some distressed assets here and there."