Smiths Medical
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Growth |
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2008 |
2007 |
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Sales |
346 |
347 |
0% |
1% |
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Headline operating profit |
61 |
60 |
0% |
4% |
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Headline operating margin |
17.5% |
17.4% |
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Statutory operating profit |
53 |
50 |
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Smiths Medical focuses on three distinct therapy areas - vital care, medication delivery and safety - within the much broader medical devices market. It aims to leverage these products through a widespread and growing international sales network.
Medical reported sales and margin at broadly similar levels to last year. Growth was hampered by a weak performance in Critical Care, which faced two specific supplier problems, and adverse currency translation. In addition, Medical has continued to experience supply chain problems caused by several long-term initiatives. The simultaneous relocation of manufacturing to lower cost regions, the integration of the Medex acquisition, and the implementation of a new ERP system have all posed operational challenges. These factors combined to adversely affect relationships with major customers. A 24-month performance improvement programme has begun and a new global operations team recruited to address these issues. The implementation of a global ERP system has now restarted and this will help support the creation of an effective supply chain. The volume of unfulfilled orders with customers has been reduced in the first half but there is long way to go in rebuilding relationships with customers. Delivering this improvement programme is a key priority.
In early March, in consultation with the US Food and Drugs Administration (FDA), Medical began notifying a small proportion of people using certain ambulatory pumps, of the need for a voluntary recall of their equipment. Medical's internal processes had identified a fault in a component supplied by a third party and some 2,000 pumps will be replaced. The issue has been traced to a quality breach by a longstanding supplier who has taken appropriate actions to ensure future consistency.
A number of significant two- or three-year contracts were secured across the product portfolio during the period. These include a three-year Group Purchasing Organisation (GPO) contract with Premier Purchasing Partners, to supply PORT-A-CATH® implantable access systems to Premier's 1,700 hospitals and almost 50,000 other healthcare sites across the US. Since the period end, a new three-year agreement has also been signed with MedAssets for five categories of anaesthesia products and a contract has been secured with Amerinet, for closed suction products. In addition we have agreed a ground-breaking initiative with Cardinal Health that will see co-branding of Smiths EDGE safety needles. This agreement adds a significant new potential market for this highly successful line. Over the course of the past three months, these and other GPO contracts totalling $18m have been secured.
We have seen double digit growth, albeit from a low base, in emerging markets served via our distributors, particularly in Latin America, Russia and Saudi Arabia. Last year's investment in new infrastructure for Greater China contributed to a 31% growth in sales in that territory.
There is an ongoing focus on margin improvement through cost control and efficiencies. For example, the manufacturing rationalisation programme increased the proportion of all employees working in low-cost countries from 28% last year to 34% for this period. 61% of direct manufacturing employees are now working in Mexico, compared with 53% in the same period last year.
Total R&D investment has increased by 4%, and as a proportion of sales has increased from 3.4% to 3.6%. Looking forward, we expect this commitment to increase further. We are now focusing our investment more tightly on product areas and segments which will deliver higher growth. For example, our R&D investment in medication delivery infusion pumps is typically much higher at around 7% of sales. We plan to increase the number of new product launches by about 50% in the current year, with the aim of raising the percentage of sales from products that are less than three years old.
To support this aim, we have recently introduced an improved new product development process. Over the course of the past six months, the US Food and Drugs Administration (FDA) has issued clearance for the Saf-T Closed Blood Collection System® Devices, the dual-lumen implantable access systems (P.A.S. PORT® T2 POWER P.A.C. and PORT-A-CATH® II POWER P.A.C), the Theraheat heated humidification system and the GRIPPER® Micro Safety Needle. We have also launched this month CADD Solis™, a next generation ambulatory pump system, which features error detection software and data connectivity to hospital IT systems. A full range of EDGE safety needles has also been recently launched, together with the latest closed blood sampling product, Hemodraw, which is already winning market share in the US.
Looking ahead, the key priority for Medical is to reduce unfulfilled orders and address the issues caused by the supply chain disruption last year, while refreshing the existing customer offering through the introduction of new products. It will also focus on operating efficiencies and margin improvement while improving service to regain customers.