May 1, 2014 / 6:51 AM / 4 years ago

UPDATE 2-Smith & Nephew keeps faith in strategy as rivals merge

* Q1 trading profit $229 million vs f‘cast $231 million

* Revenue of $1.07 billion vs f‘cast $1.09 billion

* CEO rules out big deals in reconstructive surgery

* Shares down 0.8 pct (Adds CEO comment, analyst reaction, shares)

By Paul Sandle

LONDON, May 1 (Reuters) - Smith & Nephew (S&N), Europe’s largest maker of artificial joints, plans to sit out consolidation in its core business sector, saying that bigger is not necessarily better and more attractive opportunities can be found elsewhere.

S&N, which posted a 5 percent drop in first-quarter trading profit on Thursday, faces stronger competition in reconstructive surgery after Zimmer Holdings announced last week that it had agreed to buy rival Biomet for more than $13 billion.

Analysts said that consolidation in the $45 billion global orthopaedics market had been a long time coming and that it could result in S&N being relegated to a second-tier of providers, trailing industry leader Johnson & Johnson, Zimmer-Biomet and Stryker.

S&N Chief Executive Olivier Bohuon, however, said Zimmer’s move was defensive and that it would not threaten his company’s access to U.S. hospitals or its track record in innovation.

“Many people believe that being bigger is better: we don‘t, especially in reconstruction,” he told reporters.

“The deals we have done are all in high-growth segments - we want to rebalance Smith & Nephew - so I am not at all interested in (deals) to become bigger in reconstruction.”

The market for reconstructive surgery has achieved little or no growth in established markets in the United States and Western Europe in recent years.

S&N had a tough first quarter in reconstructive surgery, especially in the United States, where revenue fell 2 percent, though Bohoun said some expected first-quarter business had come in before the end of last year as customers pulled forward surgery ahead of changes to U.S. healthcare insurance.


Profit was also knocked by investment in new products and marketing, including a TV campaign for its hip products, which Bohoun said would improve sales in the second half.

Bohuon is cutting costs and aligning the company to better serve emerging markets and faster-growing areas such as sports medicine, broadening its product range by agreeing to buy sports medicine company ArthroCare Corp for $1.7 billion in February.

S&N shares were trading 0.8 percent lower at 912 pence by 0946 GMT, though they have retained most of the 4 percent gains made on M&A speculation across the healthcare sector immediately after announcement of the Zimmer deal.

Investec analyst Nicholas Keher said S&N’s results were weaker than even revised expectations.

“That said, revenues are in line with our forecasts and the miss is primarily due to the timing of overhead investment to support growth,” he said. “For us, the weak first quarter was well flagged and the long-term outlook remains strong.”

S&N posted a first-quarter trading profit of $229 million on revenue of $1.07 billion, up 1 percent on an underlying basis, both narrowly missing consensus analyst forecasts.

A company-supplied survey of analysts had forecast trading profit of $231 million on revenue of $1.09 billion. Adjusted earnings per share of 17.7 cents, down from 18.5 cents a year, also came in short of an expected 18.2 cents.

Bohuon, however, said the group remains confident in its 2014 outlook as it rolls out new products and sees an increasing contribution from acquisitions.

Editing by David Holmes and David Goodman

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