Smith & Nephew sees more sector deals, not under investor pressure

LONDON Fri Aug 1, 2014 10:29am EDT

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LONDON (Reuters) - Smith & Nephew (S&N), Europe's largest maker of artificial joints, expects continued deal-making in the medical technology sector but has not come under pressure from investors to sell out, its chief executive said on Friday.

Olivier Bohuon, who has eschewed a wave of mergers sweeping the industry, said S&N had a bright future as a standalone group after reporting improved second-quarter results that came in just ahead of analyst expectations.

The British company is no stranger to bid talk, having been touted as a target, on and off, ever since receiving an approach from Unilever in 1968.

But the deal rumors have lately grown louder, with a wave of U.S. healthcare companies now striving to move their tax bases abroad in a tactic known as "inversion".

Reports that Stryker was considering such a move on S&N in May sent its shares surging, only for the U.S. rival to rule out bidding for six months.

S&N shares were up again on Friday, gained 3.7 percent by 1405 GMT.

While Bohuon sees no strategic case for getting bigger in orthopedics for the sake of it, he acknowledged that inversion deals were likely to continue.

"Are we going to remain independent? It is not up to me to tell you that - I don't have the answer. But I believe we have a good future, we have great growth in front of us, we have a number of new programs and I believe success is here," he told reporters in a conference call.

"I don’t have any specific pressure from shareholders at this stage.”

REGAINING MOMENTUM

The company reported a 10 percent rise in second-quarter trading profit as it regained momentum after a weak start to the year, despite problems in wound management.

It made a quarterly trading profit of $255 million on revenue of $1.15 billion, up 7 percent from a year earlier.

A company-supplied survey of analysts had forecast trading profit of $250 million on revenue of $1.14 billion. Adjusted earnings per share of 20.4 cents, up from 18.0 cents a year, also came in above an expected 19.4 cents.

S&N took a $25 million provision for problems associated with its Renasys negative pressure wound therapy product and said it expected a $30 million hit to revenue this year.

"This should be a temporary issue, so is not significant to the longer term, in our view, and should not detract from what were otherwise reasonably strong results," said Tom Jones, an analyst at Berenberg Bank, which has a "hold" rating on S&N shares.

Bohuon also unveiled a new "no frills" service for U.S. customers that will slash the cost of buying its replacement hips and knees.

The so-called Syncera service is designed to strengthen S&N's position in a highly competitive market and appeal to between 5 and 10 percent of U.S. hospitals that cannot afford its full-service offering.

By stripping away some traditional costs, such as sending a company technician to attend procedures, U.S. customers using Syncera could cut costs by 40 to 50 percent.

S&N said it expected to start shipping the first product under the new system shortly, adding that its profit margins would remain broadly similar since operating costs under Syncera would be sharply lower.

Bohuon said he remained confident in the company's prospects this year, although the wound management business was expected to grow more slowly than the wider market.

(Editing by Tom Pfeiffer and David Holmes)

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