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UPDATE 2-Getinge stock hit by profit warning as costs to bolster quality mount
March 7, 2014 / 8:16 AM / in 4 years

UPDATE 2-Getinge stock hit by profit warning as costs to bolster quality mount

* Sees Q1 pretax of about 160 mln SEK vs f‘cast 600 mln

* Warning is Getinge’s third in just over a year

* Consultants to cost 125 mln SEK per quarter for 6-7 qtrs

* Shares tumble 19 percent, hit lowest in 11 months (Adds CEO, analyst comment, share price)

By Niklas Pollard and Johannes Hellstrom

STOCKHOLM, March 7 (Reuters) - Medical technology group Getinge AB has warned of a sharp fall in first-quarter earnings and said it faced more than a year of heavy spending to boost its quality controls, sending its stock down nearly 20 percent to an 11-month low.

The profit warning is the third in just over a year from the Swedish company, a maker of surgical theatre equipment such as products for heart surgery and anaesthesia, and the company’s chief admitted executives may have failed to manage effectively following rapid growth in recent years.

Analysts said the latest statement would undermine confidence in management, until recently lauded for creating an business with a stock market value of some $8 billion through bold acquisitions.

“Confidence will undoubtedly weaken overall,” analyst Richard Koch at brokerage Kepler Cheuvreux said.

Getinge said it expected pretax profit to fall to about 160 million crowns ($25 million) from a year-ago 252 million, after being hit by a mix of higher costs for consultants to help boost quality controls, a downturn in orders, production problems and challenging currency swings.

The estimated outcome is far below a forecast 600 million crowns according to SmartEstimates, which weights analyst estimates on the basis of the accuracy of their previous forecasts.

Driven by steady demand growth and a series of acquisitions over the past decade, including a company called Datascope and parts of U.S.-based Boston Scientific Corp, both in 2008, Getinge shares had since 2000 racked up six times the gains of the broader Stockholm market.

“The group has grown and it may be that in the complexity that the growth has generated that we don’t have the amount of oversight that we should have had,” Getinge Chief Executive Johan Malmquist told a conference call.

“We are shipping safe products and great quality products, but the system behind is not at the level where it needs to be.”

Getinge shares were down 19 percent by 1309 GMT, heading for their biggest ever one-day decline in trading volumes that were 9 times the daily average over the past three months. The stock fell as low as 187.4 crowns, its lowest since last April.

QUALITY CONCERNS

Getinge has been looking to fix quality issues following inspections by the U.S. Food and Drug Administration (FDA) last year.

It said it was reviewing controls at all manufacturing sites within its Medical Systems unit, which accounts for roughly half of group sales, and expects consultants brought in to address the issues to cost about 125 million crowns per quarter for a period of six to seven quarters.

“Had the warning been tied to a one-off and a weak (first quarter) ... only, this would have been OK,” Danske Bank said in a note to clients. “But the fact that Getinge will need help from consultants for six to seven quarters points to a fundamental issue within the company.”

Getinge also said output at one of its units had been disrupted due to a change in material specifications for a supplier, denting earnings to the tune of 60 million crowns.

More worryingly, the company said sales in its Medical Systems unit had been lower during the first quarter, adding that currency levels had grown more adverse.

“The most important part of this is that they are quantifying the warning from the FDA that they mentioned before, but for which they have not communicated any sense of seriousness,” Swedbank Markets analyst Johan Unnerus said.

“The other part is that they have seen quite low growth ... One has asked oneself when there will be a recovery, and now they go from bad to worse.” ($1 = 6.4053 Swedish crowns) (Additional reporting by Helena Soderpalm and Bjorn Rundstrom; Editing by Jane Merriman and David Holmes)

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