Business review: Smiths Medical

Smiths Medical is a leading supplier of specialist medical devices and equipment for global markets.

In medication delivery, our devices help treat cancer patients and provide relief to those in pain. Our vital care products reduce hospital-acquired infections, manage patients’ airways before, during, and after surgery, maintain body temperature and assist reproduction through IVF therapy. Our safety products keep health workers safe by helping prevent needlestick injuries and reducing cross-infections.

Principal operating regions

Manufacturing is concentrated in Mexico, the US, the UK, Italy, Germany and China. We sell to over 100 markets worldwide, with the US being our largest single market with 50% of sales.

Customers

We estimate that around three-quarters of our end customers are hospitals, with the remainder comprising the alternate care market such as home care, clinics and other surgery centres. We have a direct sales presence in 20 countries, with distribution arrangements in many others.

Competitors

The competitive landscape for Smiths Medical is complex as we compete with different businesses across the wide range of product areas. Our competitors include Covidien, Teleflex, B Braun, Becton Dickinson, Hospira, CareFusion and Vital Signs, among many others. In many cases, we compete only with a small portion of their medical businesses so comparison between peers is not straightforward.

Suppliers

Our strategic focus is to reduce the current number of suppliers, while strengthening relationships that are key to the Division's success. The following five commodities account for around half of our direct spending: injection moulding, purchased finished goods, packaging materials, syringes/needles and electronics. Among indirect purchases, the top five account for around three quarters of our spending: freight, services, travel, temporary labour and capital equipment. We are also working with other divisions to reduce costs and leverage economies of scale.

Pandemic preparedness

Production of Smiths Medical's EDGE™ range of safety syringes has been stepped up as the US Government prepares to combat the threatened pandemic spread of H1N1 flu this winter. The Department of Health and Human Services (HHS) has placed an order that could reach $10m as part of its national flu preparedness efforts. The EDGE™ syringes, which maximise vaccine delivery through elimination of 'dead space' in the hypodermic chamber, can be activated single-handedly, reducing the chance of needlestick injuries to medical staff. Such medical safety devices are already the norm in the US and the European Parliament has now agreed in principle to move towards greater use of products (such as these syringes) that protect patients and health-care workers.

Markets and trends

Healthcare spending continues to increase worldwide, driven by demographics – ageing populations and increasing prosperity - particularly in Asia. The overall world market for devices and equipment of the type supplied by Smiths Medical is estimated to be worth £4.0 billion and is growing consistently. Smiths Medical has a global reach in the design, production and distribution of medical device products, with sales and marketing activities in over 100 countries. Its product ranges serve three main markets – medication delivery, vital care and safety.

Medication delivery

Smiths Medical designs and manufactures drug delivery systems that relieve acute and chronic pain (CADD and Medfusion) and chemotherapy delivery systems to treat cancer patients (CADD). The global market for medication delivery products is estimated to be worth £1.5 billion and growing at around 4-7% a year. 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. We are a leader in ambulatory infusion, with a strong position in hospital infusion particularly in the syringe pump market.

Vital care

Smiths Medical's products manage patient airways before, during and after surgery (Portex), aid patients with breathing difficulties (Portex, Pneupac), help to maintain body temperature (Level 1), monitor vital signs such as blood pressure and heart rate (BCI, Medex) and assist reproduction through IVF therapy (Wallace). The market for vital care products grows at around 2-4% annually, partly due to a steady increase in the incidence of 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. We are a market leader in airway products.

Safety devices

Smiths Medical makes effective safety devices that prevent needlestick injuries and reduce cross infections. These cover a range of functions including drawing blood samples (Jelco), administering injections and vaccinations (Jelco), and delivering intravenous drugs (Deltec). The global market for safety products is estimated to be worth £1.0 billion and growing at 3-5% annually. Smiths Medical is one of the world's leading suppliers of safety needles and catheters.

Looking at trends across the business, 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 Portex Acapella respiratory therapy system – and it is becoming a focus for our vital care products.

The advantages of using safety devices are well understood in the US, and there is now greater recognition of the contribution safety devices make towards 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. Safety products are also being introduced into other areas of healthcare, such as dentistry.

Performance

 

2009
£m

2008
£m

Reported
growth

Underlying
growth

Sales

834

703

19%

(2%)

Headline operating profit

164

140

17%

(4%)

Headline operating margin

19.7%

19.8%

 

 

Statutory operating profit

148

119

 

 

 

At reported exchange rates, Smiths Medical's sales grew 19% while headline operating profit increased by 17%. Reported sales benefited from currency translation (£139m) and acquisitions (£7m) which, if excluded, give an underlying sales decline of 2%. Sales were affected by our decision to exit the diabetes market which reduced revenue by £9m. Excluding all diabetes sales, underlying sales declined by 1% in the year. Headline operating profit benefited from currency translation (£28m) and acquisitions (£4m). Operating profit margins declined slightly; underlying profit slipped 4%. Our ongoing cost reduction efforts began to show their full effects in the second half, although we do not expect to benefit fully from these actions until the new financial year.

In the overall medical device market, the economic downturn has adversely affected hospital capital budgets, although we are now seeing a gradual improvement in some parts of the world. Excluding diabetes, hardware sales were down 5% while sales of our disposable products were flat. The outbreak of H1N1 'swine' flu, caused some hospitals to limit access so they could focus on caring for people affected by H1N1. However, Smiths Medical was unaffected because most of our products are vital for healthcare staff and some are used in the treatment of flu.

We have continued to deliver operational improvements which, in conjunction with the beginning of a hardware market recovery and stabilisation of disposable sales, has helped deliver a stronger second half. Customer backorders have been halved since last year enabling further improvements to customer service, thus boosting our customer recovery and retention efforts. Finally, we cut headcount in Smiths Medical by around 1000 throughout the year. These actions will help improve margins in the coming year.

In Medication Delivery, underlying sales declined by 4% for the year. Excluding diabetes, sales were only slightly down reflecting an improvement during the last six months from increased sales of CADD®-Solis pumps. The planned exit from the diabetes business has gone well, with the decline in sales in line with expectations. Elsewhere, deferrals of purchases of our infusion systems by some large customers have continued, most notably in Canada, although we expect those sales to recover. Sales of our next-generation ambulatory smart pump, CADD®-Solis, grew during the second half in North America and are gaining considerable traction in other English-speaking markets. The pump will be available in other languages in the new fiscal year.

Vital Care underlying sales declined by 3%, but delivered a stronger performance in the second half from our temperature management franchise. We also saw small increases in sales of our respiratory products because of the H1N1 flu outbreak. Our tracheostomy business delivered strong growth and we plan to undertake a new e-business initiative to support our custom tracheostomy products.

Safety Devices underlying sales grew by 2%, driven by a number of OEM agreements, co-branded sales, and an increase in our base business. In some markets, particularly outside the US, we continue to see competitive pressure from lower-cost safety catheters, which has slowed the growth rate of this franchise. However, we see an opportunity for safety products to be taken up more widely in the EU since the EU parliament agreed a move toward their adoption.

Our product portfolio review has led to a number of strategic decisions that will improve margins. On pricing, we have identified £6m in improvements in our product 'tail', and have already delivered £3m in the year across the total portfolio. We plan to eliminate 3,000 SKUs, effective 31 October, with no negative responses from customers to date. This will simplify the business and provide opportunities to sell alternative products. We are rolling out a more sophisticated account management system globally to improve customer profitability.

Efficiency improvements and cost reductions are protecting business performance during the current downturn and positioning the business for greater margin growth as conditions improve. The North American restructuring programme is now virtually complete with the three former operational units now managed under a single management team. Though primarily intended to ensure one face to the customer, we have been able simultaneously to drive business efficiencies.

Implementation of our global ERP business systems is on track for completion by March 2010 and is within budget. Virtually all of the products we sell already flow through the ERP system at some point in the supply chain. Additionally, we have rolled out a strategic global sales data warehouse. The ERP project remains on track to deliver annual savings of £15m, and is providing better transparency to key information, thus enabling more data-driven business decisions.

Expansion in fast-growing market

The acquisition of the Hangzhou-based medical instruments manufacturer ZDMI, now known as Smiths Medical Zhejiang (SMZ), has expanded Smiths Medical's presence in the vast and rapidly growing Chinese market. Sales of its range of syringe pumps and enteral feeding devices have exceeded expectations and we plan to make SMZ a low-cost R&D base for the development of hospital infusion products for China and other international markets. The first drug pumps from SMZ to include 'medication error' software, designed to prevent over-infusion of drugs, will be launched by the end of calendar 2009.

Business developments

Our acquisition in November 2008 of Zhejiang Zheda Medical Instrument Co. Ltd ("ZDMI"), now known as Smiths Medical Zhejiang (SMZ), has exceeded our expectations (contributing £7m in the year). We plan to make SMZ a low-cost R&D base for the development of hospital infusion products for China and other international markets.

Research and development

Our R&D spend was £29m (2008: £26m) or 3.5% of sales (2008: 3.7%). However, a more important measure is the amount of sales from products launched in the last three years, which is up 12% year-on-year. Our new, focused approach has significantly improved the efficiency of our R&D spend and has helped us execute nearly all of our planned product launches on time and within budget.

Our highest-profile new product launches have met or exceeded our expectations. This includes smartX®, the first wireless blood pressure monitoring device; Uniperc®, a tracheostomy device for people with large necks; and CADD®-Solis infusion pump and associated medication error prevention software. During the second half, we launched a new set of disposable circuits for our Pneupac ventilators; the SACETT endotracheal tube, which is designed to help prevent ventilator-associated pneumonia; and the Stimulating Plexus Needle in our peripheral nerve block line. Each of these new products fills a gap in, or extends, one of our strong product lines. Early signs from these recent launches have been positive.

Outlook

Smiths Medical will focus on its performance improvement programme through a number of initiatives. The SKU, portfolio and customer profitability reviews will reduce complexity, while cutting overheads. R&D will help drive top-line growth through new product launches. The underlying revenue momentum achieved in the second half is expected to continue but will be held back by the exit from the diabetes market. Margins should improve as we benefit from the cost initiatives taken to date.



Smiths Group divisions:
Smiths Detection, Smiths Medical, John Crane, Smiths Interconnect, Flex-Tek

 

Smiths Group plc:
Registered office 2nd Floor, Cardinal Place, 80 Victoria Street, London SW1E 5JL, UK
Incorporated in England No. 137013
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