Review from our Chairman and Chief Executive
Business Reviews
Group Overview
Group revenue by business unit
Group revenue by geographic market
Orthopaedics
Global orthopaedics competitor share
Market value: $15.5 billion
Market growth: +8%
The global orthopaedics market served by the Group consists of orthopaedic reconstruction and orthopaedic trauma
Orthopaedics revenue by business segment
Our Orthopaedics business (consisting of Reconstruction, Trauma and Clinical Therapies business segments) reported revenues of $2,158 million in the year, an underlying1 increase of 5%.
Structurally, we formed a single Orthopaedics business in July 2008 by uniting our Reconstruction and Trauma businesses, increasing the efficiency of our management and operational structure.
In May 2008, we announced that we had uncovered unacceptable selling practices in the former Plus businesses and anticipated that harmonising these sales practices would reduce revenues by about $100 million in a full year. During 2008 we estimate we lost $64 million of sales due to these issues and we are now reducing our full year lost sales guidance to around $80 million, reflecting the trading patterns to date. In January 2009 we announced that we had achieved agreement with the vendors of Plus to reduce the total original purchase price by Swiss Francs 159 million from the Swiss Francs 1,086 million paid and release them from substantially all of their warranties. We believe the strategic logic behind the acquisition remains intact and, with this settlement behind us, we anticipate a better year in Europe in 2009.
In the US, Orthopaedic revenues grew by 8% to $1,127 million, in Europe revenues were down 3%, (grew 6% excluding Plus impact2) and they grew 14% in the rest of the world 3.
Orthopaedic Reconstruction grew revenues at 6%, compared to the market rate of 7% (excluding the Plus impact, revenues grew at 8%). In the US, Reconstruction revenues grew by 9%. Europe was significantly impacted by the Plus issues, and but for this, would have grown by 5%.
Our knee segment performed strongly growing by 7%, driven by the new JOURNEY◊ Active Knee Solutions and LEGION◊ Total Knee System family of products. In the hip segment growth was 5%, encompassing a good performance across our whole range.
Orthopaedic Trauma grew by an annual rate of 4% to $421 million (9% excluding Plus impact), as the actions we took in the US on management structure and sales force incentivisation started improving our growth performance. In terms of products, TRIGEN◊ INTERTAN◊ Intramedullary Nail System and PERI-LOC◊ VLP Variable Angle Locked Plating System grew well.
Clinical Therapies grew by 4% to $246 million (8% excluding Plus), driven by sales growth from our EXOGEN 4000+◊ Ultrasound Bone Healing System and DUROLANE® Hyaluronic Acid Stabilised Single Injection for the treatment of knee pain outside the US.
We have invested heavily in compliance this year and we expect these costs to continue as we work to meet the terms of the industry-wide settlement with the US Department of Justice and further enhance our compliance procedures elsewhere in the Group. We believe that enforcement by governments of high standards of compliance produces a level playing field across the industry and that Smith & Nephew will benefit from this in the longer term.
Orthopaedics trading margin in the year was 22.3%, compared to 22.8% in 2007. This decrease reflects the consolidation of lower margin Plus sales, the margin impact of Plus lost sales and increased compliance costs, together exceeding the operational improvements we have been making.
Endoscopy
Global arthroscopy competitor share
Market value: $2.5 billion
Market growth: +12%
Endoscopy revenue by business segment
Endoscopy revenue increased to $800 million growing by 8% on an underlying basis.
US revenues grew by 3%, Europe and the rest of the world maintained double digit growth at 11% and 15% respectively. In the US, we have taken actions to reinvigorate our sales performance and drive further growth from our portfolio of leading products. This initiative gained momentum throughout the year, particularly in the repair segment of arthroscopy, and will continue into 2009.
Globally our Arthroscopy segment grew at 9%, driven by another strong performance in repair products and an improved contribution from resection. We continue to introduce innovative products to these businesses, such as the FOOTPRINT◊ PK Suture Anchor and the bioabsorbable BIOSURE HA◊ Interference Screw. Globally, Visualisation growth was 6%; with US hospitals reducing or deferring capital purchases in the fourth quarter of 2008.
The Endoscopy trading margin was 20.7%, an increase on the 20.1% achieved last year.
Advanced Wound Management
Global advanced wound management competitor share
Market value: $5.2 billion
Market growth: +7%
Advanced Wound Management underlying growth rate
Advanced Wound Management revenues grew by 7% to $843 million and out performed the market growth rate during the second half of 2008. Europe and the rest of the world again produced good results with growth of 8% and 10% respectively. This was offset by a weaker performance in the US where revenues were down 1%.
Within our higher added value segments of Infection Management and Exudate Management our growth, of 9% and 7% respectively, was driven by the extension of our ALLEVYN◊ brand to new products. We launched our NPWT products in March 2008 and, with an expanded range of products to introduce, we believe we are well positioned to grow this segment strongly. This area is the subject of litigation and we will continue to defend our intellectual property position vigorously to the benefit of customer choice. The US wound care market, where our performance this year has been mixed, is the largest healthcare market in the world and will be a significant focus for 2009.
Advanced Wound Management achieved a trading margin of 15.3%, a decrease on 17.4% last year as we made significant investments in the launch of NPWT. As part of our Earnings Improvement Programme we installed the first plant and equipment in our new Chinese factory.
Notes
- Revenue growth percentages are in underlying increases which are adjusted for the effects of currency translation and acquisitions. Underlying revenue growth provides a consistent year on year measurement of business performance. Revenue, trading profit and operating profit by business segment is set out in Note 3 and Note 4 of the Summary Financial Statement.
- Adjusted for the impact of Plus sales lost following the harmonisation of sales practices in parts of Europe.
- Rest of the world consists of Africa, Asia, Australasia and Other America.