Smiths Medical
Divisional developments and performance
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Smiths Medical |
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Description
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Employees |
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Principal operating regions |
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Contribution to 2007 Group sales
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Key customers |
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Business developments
Smiths Medical continues with a major integration and rationalisation programme which includes the integration of Medex.
Manufacturing rationalisation has continued and the cessation of manufacturing at Hythe, announced in July 2006, remains on track for completion by January 2008. A smaller rationalisation of German manufacturing arrangements was announced during the year. The reorganisation of distribution facilities also reported last year has continued.
The implementation of a common global computer platform continued with the UK launch in February 2007. This, together with the manufacturing restructuring, has caused some temporary disruption to the internal supply chain, now resolved.
Internationally, Smiths Medical has acquired distributors in many of its key territories. Most recently in December 2006 the Spanish distributor, Tecnicas Medicas, was acquired for £12m. This strategy provides effective routes to market when countries adopt clinical best practices many of which, like the use of safety devices, have originated in the USA.
Markets
Smiths Medical’s product ranges serve three main markets – medication delivery, vital care and safety. Healthcare spending continues to increase worldwide, driven by demographics. The overall world market for devices and equipment of the type supplied by Smiths Medical is estimated to be worth £3.5 billion and growing consistently at an average rate of 5% per annum.
In the US Smiths Medical is benefiting from the move towards treatment of illnesses in their chronic, rather than acute stages. A number of airway management products and ambulatory pumps already address this trend – such as the CADD ambulatory infusion pump range and the Acapella respiratory therapy system – and it is becoming a focus for our vital care products.
The global market for medication delivery products is estimated to be worth £1.5 billion and growing at around 6% per annum. This growth is due to the increase in treatment of chronic conditions, integrating medication delivery devices with hospital IT systems, and the move to treating patients outside hospitals.
The market for vital care products is showing annual growth of around 4%, partly due to a steady increase in chronic respiratory diseases and obesity. Demand is increasing for single use devices such as Portex airway management products. The market is expected to continue growing as the number of operations and intensive care beds both increase. This market is currently worth about £1.5 billion a year.
The global market for safety products is estimated to be worth £500m and growing at 6% per annum. The advantages of using safety devices are well understood in the US, and there is now greater recognition of the contribution safety devices make to improving the safety and productivity of healthcare employees. In other geographic markets, conversion to safety products is in its infancy, with opportunities for rapid future growth. Demand for the Jelco ProtectIV range of intravenous catheters continues to grow and the product is seen as leading the field in Europe and the US. Since the acquisition of Medex, product launches have included a new range of Jelco AdvantIV passive safety catheters and an extended needle safety portfolio. Safety products are also being introduced into other areas of healthcare, such as dentistry.
Smiths Medical has respected brands including CADD, Medfusion, Portex, Level 1, Medex and Jelco, competitive positions, considerable expertise in design and manufacture and a worldwide sales network.
Performance
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2007 |
2006 |
Movement |
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Sales |
691 |
737 |
(6)% |
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Headline operating profit |
127 |
133 |
(5)% |
Sales
Sales fell 6% in the period. Adverse movements in exchange rates are responsible for £45m of the total £46m reduction.
In this period Smiths Medical failed to match market growth and sales declined by 1% on an underlying basis. The shortfall was due to temporary supply disruption arising from the substantial change programme underway. Production moves from Hythe (UK), and Kircheseeon (Germany) to plants in lower cost regions are now nearly complete. New integrated computer systems have been introduced, and manufacture of high volume products is now concentrated at highly automated plants close to the principal market.
These major changes in the structure of the internal supply chain resulted in a faster utilisation of safety stocks and a slower ramp up of production than was required to satisfy demand. Action was taken to increase capacity, in terms of the workforce in Mexico and investment in plant and machinery. Customers’ requirements can now be met in full and inventory levels are being rebuilt.
At the same time, cost savings were achieved across the business, enabling the margin to advance even while sales were not growing.
In the US, group purchasing organisations are important customers and in the year a number of sizeable agreements were reached with Premier, Novation and Broadlane covering a wide range of products.
The Japanese business, which represents about 7% of total sales, has been held back by pricing pressure from the government reimbursement programme and a drive for improved efficiencies in the public sector. However, there are also some important areas of growth, including a Government initiative to improve cancer treatment, which is already benefiting the infusion business.
Headline operating profit
Headline operating profit fell 5% in the year. The translation of overseas earnings at weaker average exchange rates reduced profit by 7%. Underlying profit growth excluding acquisitions, disposals and the effect of exchange translation was £2m. On a statutory basis, operating profit was £106m (2006: £104m).
The decline in sales is not reflected directly in operating profit because underlying profit benefited from:
- increased manufacturing in low-cost countries; and
- the incremental gain from the continued integration of Medex.
Research and development
Investment in R&D remained steady at £25m. Of this, £15m (2006: £16m) was charged against headline operating profit, with the balance being capitalised.
Recent new products which will help to drive future growth include: power-injectable ports and needles for improved cancer treatment; a comprehensive range of safety syringes; a broad range of respiratory devices; consumables and software upgrades for infusion pumps including a Chinese language variant of our insulin delivery pump.
Smiths Medical has also been investing in process technology. Moving to high-volume, high-speed automated production will help to improve margins and increase market share, particularly for one-time-use consumable products.
Forward-looking issues
Smiths Medical will focus on premium products with strong brands in growing niche markets. The year ahead will bring further significant product launches in key market segments. The industry remains relatively unconsolidated, with opportunities to add adjacent product lines.